Credit scoring formulas are a well-guarded secret, but installment debt is typically considered more favorably than credit card debt. However, if you have credit cards with low balances and lots of available credit, they could potentially be a major positive factor in your credit score.
Key takeaways
Personal loans are best for large, one-time purchases or bills. Credit cards are best for everyday spending and reward programs. Both can have a positive impact on your credit score if used responsibly. Compare fees, rewards and repayment terms before deciding.
Start chipping away at your highest-interest debt first.
Every dollar counts. Once you pay off that credit card or other high-interest debt, put the money you were paying on your highest interest debt—the minimum plus the little extra—towards the debt with the next highest interest rate.
Credit cards generally have higher interest, and you have to begin paying them back immediately. Student loan payments are deferred until you graduate, and even though the interest can seem like a lot, it's less than a credit card.
Financially, paying off your highest-rate card first makes the most sense because it may save you more money over time. For help with this strategy, use the Snowball Debt Elimination calculator on your EY Navigate™ website or mobile app.
Option 1: The “high-interest first” strategy
Paying off high-interest debt first is commonly referred to as the avalanche method. This involves making the minimum monthly payments on all of your credit cards and loans, but putting every extra penny you can toward the card or loan with the highest interest rate.
1% of the balance plus interest: It would take 29.5 years or 354 months to pay off $10,000 in credit card debt making only minimum payments. You would pay a total of $19,332.21 in interest over that period.
Lower Interest Rate
In general, personal loans tend to have lower interest rates than credit cards. According to the latest Federal Reserve data from August 2024, credit cards have an average interest rate of 23.37% compared with the average 12.33% for 24-month personal loans.
A personal loan can affect your credit score in several ways—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score in the short term and make it more difficult for you to obtain additional credit until the loan is repaid.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
You don't want to check your debt-to-income ratio every time you make a few charges. So, there's an easier ratio you can use to measure when you have too much credit card debt. It's your credit card debt ratio. Generally, you never want your minimum credit card payments to exceed 10 percent of your net income.
Is $5,000 a lot of debt? The answer will depend on your credit limits. If you have $10,000 in available credit across two cards, then your utilization is 50%, which is a bit high and can hurt your credit score. But if you have $20,000 in credit across three cards, you're only using 25%, which is in a healthy range.
Key Takeaways
Types of debt that cannot be discharged in bankruptcy include alimony, child support, and certain unpaid taxes. Other types of debt that cannot be alleviated in bankruptcy include debts for willful and malicious injury to another person or property.
U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless. Paying off a high credit card balance can be a daunting task, but it is possible.
As a result, paying off credit card debt can be challenging, especially if you have a significant balance, like $30,000 in card debt. With a debt that high, it could take decades to pay off what you owe due to compounding interest.
If you missed a payment because of extenuating circumstances and you've brought account current, you could try to contact the creditor or send a goodwill letter and ask them to remove the late payment.
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).