photo credit: Vincent Boiteau

A common question asked by people looking for student debt help is “Should I pay off my credit cards or my student loans first?”

This is a tricky question, and the answer depends upon a number of factors, including;

* The rate of APR on your credit card and your student debt

* The repayment terms

So lets look at a typical student debt help example. Let’s say your credit card debt costs you 7.9% APR, while your student loan costs perhaps 3% APR.

In that situation it makes sense to pay the minimum towards your student loan and put the rest of your money towards repaying your credit card debt. As long as the interest rate on your credit card debt is higher than on your student loan, focus on clearing your credit card debt first. Over the long run, that will reduce the total amount of interest that you have to pay on your debt.

But what if the situation changes?

What if the interest on your student debt starts to creep up, and you find an amazing credit card deal? What do you do if your credit card costs 2.9% APR while your student debt stands at 4.9% APR?

Let’s look at the advantages and disadvantages of the various student debt help options;

1) Focus on the credit card debt

IDEA: Continue paying both debts individually, making the minimum payment to your student debt while putting the rest of your cash towards your credit card. Once the credit card is repaid, use all of your income to repay your student loan.

REALITY: As long as the interest rate on your student loan is higher than your credit card, this option will cost you slightly more interest in the long run. But this remains the safest option. As you’ll see below (option 4), it’s generally much safer to owe money on a student loan than it is to owe money on a credit card.

2) Focus on both debts equally

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IDEA: Continue paying both debts individually, but focus on repaying both of them at an equal pace.

REALITY: This is similar to option 1 above, the only difference being that it will cost you slightly less interest while the rate on the student loan is higher than the credit card debt.

3) Focus on the student debt

IDEA: Continue paying both debts individually, making the minimum payment to your credit card while putting the rest of your cash towards your student loan. Once your student loan is repaid, use all of your income to repay your remaining credit card debt.

REALITY: This option is just the reverse of option 1, but takes advantage of the fact that in our new example the student debt suffers interest at a higher rate. It will help you to save money on interest payments for as long as the rate of interest on your student debt is higher than on your credit card deal.

But it will remove more of your debt from the relatively save environment of a student loan at the same time as leaving more of your debt at the mercy of the commercial lending sector (this isn’t always the best option, as shown below).

4) Consolidate

IDEA: Transfer the entire balance of your student loan to your credit card to take advantage of the lower APR. Using our new example, this would reduce the rate of interest on your student loan from 4.9% APR to the 2.9% APR offered by your credit card deal.

REALITY: This could be a risky option. Okay, at present is might allow you to save a small amount of interest on your total debt, but you have to consider the differences between credit card companies and student loan providers.

Most student loan schemes are run by government agencies or educational authorities. This might sound hard to believe but outright profit is not their number one aim. And because many of these schemes are government subsidised, they often have extremely good repayment terms. Often far better than the best credit cards on the market. And they don’t usually impose such harsh penalties if you are late with a repayment.

In contrast, credit card companies exist to make money. The more money that they can draw out of their customers the happier their shareholders. So before you transfer your student debt to a credit card, you must think long and hard about it, because it’s a one time only decision. In most countries, once you’ve repaid a student loan, you can’t re-borrow the money.

How long will this low rate of 2.9% APR on your credit card last? Is it just an introductory offer that will last a few months and then revert to a much high rate of interest? Are there any penalties or restrictions in the small print.

And what if you miss a repayment? Most credit card companies will charge you a hefty fee if make a late repayment. And as if that’s not enough, some will even transfer your debt to a much higher rate of interest just because you miss a repayment. So if either of these things happen it would wipe out all your potential savings immediately. And there would be nothing that you could do about it.

Other issues to consider; Filling up your credit card with student debt could affect your credit rating. In some countries, interest paid on student loans can be used to reduce your income for tax purposes (you can’t do that with a credit card). The psychological issue – would you rather have two smaller loans or one large loan? Some people find it harder to get motivated when the task ahead of them appears to be larger.

Transfering student debt to a credit card could help you to save money but only if you make sure every payment is made on time and that you are committed to paying off the debt before the special offer interest rate ends. But it’s a big risk and there’s no way back if you run into problems.

Of all the options, when you have to choose between repaying credit card debt or a student loan, it’s usually cheapest and almost always safest to focus on repaying your credit card debt first.

by Stuart Laing

Copyright (c) Get Out Of Debt.

Have you been struggling with debt for as long as you can remember? Are you ready to do something about it? Visit http://www.icanhelpyougetoutofdebt.com for free, impartial information on how to reduce debt.

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If you have made some mistakes in the past as far as your credit is concerned, brace yourself for the facts about bad credit loans. You should first try to assess just how bad your credit is before you hit the panic button though. Very often, bad credit items that appear on your credit report can be challenged and sometimes removed. In addition, mistakes on your credit report can have an adverse effect on your credit score, shunting you into the category of a high credit risk. Items that are good news for you but do not show up on your credit report (or on one or the other of the credit reporting bureaus’ file on your credit history), can cost you some valuable points. Last, but not least, taking bad advice from well-intentioned relatives or friends can lower your credit score, making you a candidate for bad credit loans.

Bad news first

Let’s look at these possibilities for improving your credit rating one at a time. But first, let’s get the hard core issues out of the way. If you have had bad credit issues in the past and know you have made some wrong choices that may have landed you in bankruptcy or wage garnishment, it will be almost impossible to fix your situation in the short term. Medical emergencies have unavoidable consequences as well but none of these means you will not be able to find a lender of last resort.

If you are reading this you are probably at the point where you have decided to turn around your spiraling credit history, but know for sure that this will take time and will cost you money. Bad credit lenders will equate you with high risk and assign a high interest rate to whatever type of loan you are seeking in order to offset some of the risk that you may not pay back their loan on time.

Bad credit car loan

Let’s say you are in the market for a car. You will be required to make a hefty down payment on a bad credit car loan. I have heard of down payment requirements as high as $3,000 but that is not the only problem you face. Your interest rate on a bad credit car loan may range from 19% on the low end to as high as 29% on the top end. A high-mileage used car could end up costing you $400.00 or more per month in monthly payments. To minimize the damage from these high rates, I would suggest you start by calling several lenders. They usually both sell and finance the product on the spot. If you can find one whose maximum interest rate is in the low twenties you may be able to save a substantial amount of interest payments. You must make sure though, that they report your payment history to the credit bureaus as this will help to improve your credit score provided you pay on time.

Bad credit personal loan

Bad credit personal loans are issued by a variety of sources. Here again their emphasis will be on charging you a high interest rate to cover the risk of your defaulting on the loan. Payday loans are an example of bad credit personal loans that carry enormously high rates of interest as they are calculated over a short time span and are designed to get you to the next paycheck.

Other types of personal loans include equity-backed loans. Let’s say you have a home or some other asset that is almost or fully paid off. Local and regional banks or home equity specialists will lend you money using your asset as collateral. Although a loan of that nature will be safer for the lending institution, your past credit history will force you into a bracket paying somewhere around 21%, despite the use of your collateral.

Bad credit mortgage loan

This is the big ticket item that will cost you dearly over the life of the loan. Consumers with credit scores above 650 may find themselves paying say, six percent on their mortgage loan, depending on the prevailing interest rates at the time of their purchase. If you have bad credit, you should be prepared to pay two and a half to three percentage points more and sometimes into double figures on your mortgage rate. Depending on the prevailing economic circumstances you may find it very difficult to get a mortgage at any rate. You can expect that any lender looking at your loan application will expect you to have a substantial down payment in hand, ranging from 10% to 20% of the value of the home you are trying to purchase.

Not only should you expect to face a high interest rate, but also, your lender will require you to purchase private mortgage insurance to cover the risk of your defaulting on a payment. If your down payment is higher than 20% of the cost of the home you are buying, you may be able to negotiate away paying PMI, even on a bad credit mortgage loan.

As with a bad credit car loan, your history of on-time payments will begin to raise your credit score over time. Given a record of good payments, you may be able to refinance at a more reasonable interest rate. But before you sign for your bad credit mortgage loan in the first place, be sure to check the penalties for getting out of the loan early. Pre-payment penalties may be enormous and most people are so excited to get a bad credit mortgage loan, they neglect to consider what may change three years down the line.

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Cleaning up bad credit items

Let’s say your situation is so bad that you can’t find a lender willing to risk lending you money. Where do you go from here? You could wait a few years until bad credit items on your credit report fall off, usually in seven years for most items. Or you could begin the process of cleaning up your credit report as even a difference of a few points on your credit report score could make the difference between getting a loan or a refusal. If there are items on your credit report that are incorrect or should have been removed because of their age, write the credit bureaus and request their removal. They are required by federal law to make those corrections.

Mistakes on your credit report can be caused by human error. An account with a bad history could appear on your report because a clerk typed someone’s social security number one digit off. Rest assured, it happens. You could end up being saddled with someone else’s court record but you wouldn’t know until you inspect a copy of your credit report.

Include the good news

If you have paid off a delinquent account in the past but it does not show on your credit report, you will want to present proof of payment to the credit bureaus and have their records corrected. That can mean a few points on your credit report score.

You may find that a car note you have paid off was never reported to the credit bureau and though your payments were all on time, you are not receiving the benefits of that piece of good credit history. Contact the lender and ask them if they will report your credit file to the bureaus.

A word of caution

Well-intentioned friends and family often “hear” that you should do this, or that, to raise your credit report score and improve your chances of getting a bad credit loan. The most popular advice is that you should close your credit card accounts. This may sound reasonable but may affect you adversely. Make sure that if you take that route, you do not close the accounts with the longest history. It may be safer to close newer accounts but you should know that part of your credit report score is calculated by looking at the ratio of outstanding debt to total available credit. Close some accounts, lower your available credit and your score could go down.

Douglas Michaels is an editor, publisher and columnist. He works in the financial industry and now dedicates his time to helping others educate themselves on improving their credit scores. For more tips on credit matters read his blog or visit his website at http://www.my-credit-report-score.com