Are you currently overwhelmed with the amount of debt you owe everywhere? Do you cringe at the sound of Credit Card payment, loan repayment or by simply hearing the words ‘credit cards’ or ‘loan’ in general? Yes, you are in a sinking ship right now and you really need to get out before you sink along with all your debts. What you need to understand between a credit card debt and your personal loan repayment is that both directly affect your credit score and maintaining an above average credit score is of prime importance to most, if not all. This is because any professional relationship that you may get into with a financial institution in the future, your credit score will play a very significant role. Therefore, whatever move you make next in relation to the overall debt that you owe, should be towards one that will improve your credit score. If you just sit back assuming that nothing will work out and all you stand to lose by further drifting away from your responsibilities is another hole in your pocket, you need to realize that it is not only your finances that will take a hit. You need to understand that when you are indebted to anyone, especially a financial institution, it will not only take a toll on your finances, but also on your physical and mental wellbeing along with your position. This is because of the power they have to get what you owe them in one way or another. For instance, they can garnish your wages and foreclose any property or asset listed under your name because you are cheating them out of what you owe. There is no moral high ground here so to speak. There is only a lender and a borrower and between them is an agreement that you signed so they give you what you asked and in return you have made certain promises. It is not a promise that you make to a friend or a pinky swear and then apologize for not being able to keep it and then move on with your life. It is a promise that is documented and goes into your financial track record. If you go back on your word with the bank, they can even declare you bankrupt and blacklist your name so no one in their right frame of mind will ever do business with you in the future. Is that something you want hanging over your head?
Therefore, it is ok that you have a lot of debt right now and you are trying to figure out the right move, at least you are still on the right path and can redeem yourself by making a few right choices here. For the time being, stop kicking yourself for getting into such a situation and focus on getting yourself out of it. Let’s start by prioritizing. Let’s talk a little about Credit Cards so I have your attention. Isn’t Credit Card the most beautiful invention by the humankind? Yes, they are the tiniest, flashy and the most stylish pieces of plastic you will ever want to hold between your fingers. But as you already know, all pretty things are dangerous. You are now a live example to prove that, as you continue to gaze at your outstanding amount due. Simply put, a credit card is a credit that the bank extends you along with a complimentary slap of exorbitant interest rates and you no idea about how much you are actually re-paying for your purchases. When the bank gives you the card, they are like, “Here, this your credit card with a huge chunk of readily available money. You can charge it up to the maximum limit allotted with no questions asked.” Why should they question your decision to purchase whatever you want with the card when they are making money hands over fist for every charge that you add to it? You will have to make regular payments for all the charges that you have added to their credit card with interest and if you start falling behind on the payments, they will slap another interest on top of the interest for the purchases made. Slapping you right in the face hurts lesser than slapping you with such high interest rates because the impact of a direct slap lasts way shorter than you sitting and calculating the amount plus interest that you owe the bank that generously offered you so much money.
Let’s talk a little bit about personal loans now. A personal loan is offered to you by a lender where a predetermined one shot payment is given to you. You can then use this lump sum money for any intended purpose. You then have to repay the loan with a pre-determined interest rate which can be fixed or variable depending on the loan type that you have mutually agreed upon. Usually, when applying for a personal loan, it is not a necessity to put down your property or any other form of asset as collateral for the loan, making the risk involved a little lesser than before. However, irrespective of whether a personal loan is more of a risk or the credit card payment is more risky, both still remain as debt that you owe to your lender.
Since they are both debts that you owe your lender, what is the suitable order in which they should be repaid? Practically if you sit down with all your payments and need to decide the order, it is advisable to first pay off your credit card debt and here is why – it is common knowledge that credit cards have one of the highest form of interest rates compared to any other financial product out there. Hence, when you choose to pay off your credit card debt first, you are saving a lot of money in terms of the interest rate that will otherwise be incurred by you in addition to the regular payment for the purchases made using your credit card. And now that you have a credit card debt as tall as Everest, you must already be aware that once you start missing payments or resort to only paying the minimum due every month instead of the outstanding amount, you are also paying interest on top of the already existing interest on the purchases made using your credit card which is commonly referred to as compound interest. Therefore, when in doubt between choosing which debt to get rid of first, you must always choose to rid yourself of your credit card due to the compound interest factor involved here that seems to change numbers like as if it were a geometric progression series!
Another advantage of choosing to pay off your credit card debt before any of your other debts is that it will better your credit score. Let’s get real for a second here, you are drowning in your credit card debt along with a personal loan hanging over your head and this is just the start of it, you also have your other standard bills such as your household bills, phone bills etc. You don’t exactly have the perfect credit score here, you are barely scraping through and your credit score is on the line, so it won’t hurt to think about improving that, otherwise you can kiss any future transactions with a lender or a financial institution goodbye right here. This is because your credit score is not only hinging on making your payments on time but also on the total amount of debt that owe all your lenders combined. So, logically speaking, the lower your outstanding debt overall, the better your credit score will be. So handle your credit card responsibly now so you can reap the benefits of it in the future with a new and improved credit score.
After you have done the nearly impossible and detached yourself from your credit card debt by finally settling the score, make sure you use it very wisely in the near future. Let this be a learning lesson for you where you never fall short of making timely payments on your credit card and don’t let the interest compound and drown you with heavy numbers that bring a tear in your eyes. Once you are done basking in the glory of this triumph, don’t end the battle here, go ahead and conquer your personal loan as well because even though you have crossed the biggest hurdle right here, there is still one left irrespective of how big or small, a debt is still a debt. This is not a pick and choose chore that you choose either/ or between paying off one of the debts, at the end of the day you need to clear all the debts because it is not your money but money that you owe someone who is much more powerful than you and will get the amount you owe by one way or another. Even if you have chosen to pay off your credit card debt first and relieve yourself, you still need to make minimum payments on your personal loan that otherwise leans on the side of defaulting on your loan and you don’t want that. Missing your minimum payments on your personal loan will also hurt your credit score and everything you tried to sustain by focusing on paying off your credit card debt will have been in vain because the status of your personal loan debt will invariably compromise your credit score.
Now let’s say that you have more than one credit card and you have fallen behind on making payments on all of them, you still need not confuse yourself further. With new banking features being introduced on a daily basis, you can find a solution to all your banking needs. Under this circumstance, you can opt for a balance transfer credit card where you have the option to consolidate the payment of all your other credit cards and make a onetime payment. This way you don’t have to remember how much you owe for each of your credit cards individually. This attractive feature has now been adopted by many leading banks and you can obtain more information on them by contacting your bank. Or if you are feeling lazy, then just go online onto any financial website and shop for a balance transfer credit card that best suits your need and use that to make payments on all your other credit cards.
So, there you have your answer! When in doubt, always choose your credit card payment over your personal loan due to the higher rate of interest incurred on your credit card debt than your personal loan debt. But remember, just because you have made this choice, you cannot wash your hands off your personal loan to settle your credit card score, you need to continue making your minimum due payments towards your personal loan so as to not default it in the future or to not wreck your present credit score over this. Also know that both, your credit card debt and your personal loan debt have an impact on your credit score and ignoring either for a significant period of time will certainly hurt your credit score. So, settle both today so never have to settle again in the future.