Should I pay off credit card or loan debt first?

Let your interest rates guide you when deciding in which order to pay down debt. That usually means sending any extra money toward credit card debt first, then private (personal) loans, student loans, car loans and, lastly, your mortgage.

Generally, it’s best to pay off credit card debt first, followed by loan debt, as credit cards often have the highest interest rates, or APRs. The annual percentage rate (APR) represents the total yearly cost of borrowing, encompassing interest, fees, and other charges, making it a crucial factor for comparing the actual cost of different debt products.

When you prioritise paying off credit card debt, you’ll not only save money on interest, but you’ll potentially improve your credit too. That’s because reducing credit card debt directly impacts your credit utilisation, one of the most significant contributing factors to credit scores.

Here’s your guide to eliminating credit card and loan debt one by one.

How to decide which debt to pay off first

Start by sending extra money to the debt with the highest interest rate or APR. That way, you’ll begin cutting down on the principal balance of your debt, and you’ll pay interest on a reduced amount.

Typically—though not always—interest rates on credit cards are higher than on loans. The average credit card APR as of Ocotber 2024 is around 14-18%, yours may be higher or lower, depending on your personal credit profile at the time of application. In contrast, the average personal loan interest rate in February was 7% on a 24-month loan. However, personal loan rates can reach as high as 36%, depending on your credit score, the type of loan, and other factors.

There’s one exception to this rule: If you have a fast loan, it’s crucial to prioritise paying that off first, even before credit cards. Fees associated with these loans, along with their short-term nature, can result in paying costs equivalent to an APR of more than 400%. Get these out of the way before turning your attention to other debts.

Benefits of paying off credit card debt first

Here’s why it often makes the most sense to attack credit card debt as your first step:

• Less interest to pay off: The longer you hold credit card debt, the more interest you’ll pay. Plus, unless you’re actively paying down your balance, you could be paying interest charges on interest that’s already accrued. By paying off credit cards first, you prevent high-interest charges from accumulating over time.
• Reduced temptation to spend: Paying off a credit card and taking it out of your regular financial rotation will mean you’re less likely to build up debt again. It’s usually better for your credit to avoid cancelling credit accounts. However, it may make sense to use the card only sparingly, such as for a single subscription payment, and plan not to add charges to it in the future.

How to pay off debt

If you have several credit cards and loans, first make a list of your current balances, APRs, minimum monthly payments or instalment payments, and due dates for each payment. That will help you determine how to start your payoff journey. Here are a few paths you can take:

• Debt avalanche method: The most cost-saving payoff method is to target the credit card with the highest APR first, also known as the debt avalanche method. Using this strategy, you pay as much as you can on the highest-rate credit card or loan while you pay the minimum on the rest of your debts. Once you pay off the first account, you’ll move to the one with the next-highest rate and use the same strategy until all your accounts are paid off. This method helps you repay your debts faster and reduce the total amount paid in interest.
• Debt snowball method: You may prefer to pay off small balances first, a method known as the debt snowball method. Doing so won’t save you as much money as paying off debts with the highest APRs first, but it can be effective if getting a series of small wins—by paying off accounts more quickly—encourages you to continue attacking debt. This approach can be a suitable solution for those who need motivation from quick wins.
• Loan refinancing: Another option available to those with good or excellent credit is refinancing their mortgage. That’s when another financial institution pays off your prior loan or loans and issues you a new one at a lower interest rate. You can refinance a car loan, a mortgage or a student loan, and you’ll ideally refinance when interest rates are low to take advantage of the potential savings. If you then also pay off the loan quickly, you’ll save even more in interest compared to your original loan. You can refinance a consumer loan, unsecured loan, or small loan, and the new agreement will specify the loan amount, repayment period, and other terms.
• Debt consolidation loan: Similar to a balance transfer credit card, a debt consolidation loan allows you to roll multiple debts into a single personal loan with a fixed monthly payment. It’s used for repayment of instalment loans instead of credit cards. For debt consolidation to work, the interest rate you qualify for must be lower than the average rate of your current debts, so it’s most likely to pay off if you have good credit. These loans are often used to consolidate consumer loans and can help manage monthly repayments more easily.

Common uses for consumer loans and small loans include covering unexpected expenses, purchasing household appliances, dental treatment, or durable goods. Some credit cards offer purchase insurance for bigger purchases, protecting your items. Additionally, some credit cards include travel insurance and legal assistance insurance as extra benefits.

To qualify for a consumer loan or credit line, you typically need to show regular income and complete an agreement with the bank. You can manage your loan or credit card through your internet bank, using your bank account or current account, and secure authentication methods, such as an ID card, Mobile ID, or Smart ID, are often required.

You can repay the loan early, and once it is fully repaid, your financial obligation is settled.

Which loans should you pay off first?

Similar to the credit card payoff process, the best approach with instalment loans is to focus on loans with the highest interest rates or APRs.

Private loans

With an average APR of 11.48% on a 24-month loan, personal loans are right in the middle in terms of interest rates; not as high as credit cards, but often higher than other types of loans, such as mortgages. Consider paying down personal loans after you’ve made progress on your credit cards, but before turning to your other loans.

Student loans

Student loans are effectively private loans, which banks or online lenders provide. Private loans are often more costly and come with fewer benefits, such as income-driven repayment plans or payment pauses due to large-scale disasters like the COVID-19 pandemic. For most borrowers, it makes sense to pay off private loans since you have less to lose and more potential money to save in interest.

Car loan

Car loan rates are also private loans. However, your rate may be higher or lower, depending on when you first borrowed, your credit score at the time, and other factors. Compared to a mortgage, a car loan is usually smaller and more manageable to pay off quickly.

Mortgage

Mortgage rates have decreased slightly from their peak late last year, but they remain higher than they’ve been since 2007. If you bought your home since then, your rate may be low enough that paying off your mortgage should be low on your list of priorities for debt repayment. If your rate is higher than current rates—although that’s very unlikely—you can consider refinancing.

Also, mortgages tend to be very large, long-term loans of up to 30 years, so paying this loan off fast is unrealistic compared with paying off other, smaller instalment loans over a shorter time period.

To sum up

The most significant and crucial step is deciding to focus your attention on debt payoff in the first place. Once you’ve gotten there, keep it simple by focusing on your balances with the highest interest rates first, which will generally be credit cards. The same interest rate strategy applies when you’re determining the best order in which to pay off your loans.

Since this approach helps you save money on interest, you’ll be able to free up cash to put toward other debts—and financial goals even beyond debt paydown. While you work on paying down your debts, be sure to monitor your credit and keep an eye out for the benefits in your credit scores.