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Credit Card Debt vs. Payday Loans: Which to Pay Down First

Dec. 23, 2014
Credit Cards, Payday Loans
Credit Card Debt vs. Payday Loans: Which to Pay Down First
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When juggling multiple debts, it’s a good idea to consider which ones to pay off first. If you’re facing both credit card debt and a high-interest payday loan, which should you prioritize?

Payday loan vs. credit card debt

Lenders offer payday loans as a short-term fix for consumers when cash is tight. These are high-interest loans, typically backed by a borrower’s post-dated check. Since there’s no credit check involved, you can usually be approved for a payday loan quickly. But this easy-to-get money comes with a heavy price, usually in the form of exorbitant fees and triple-digit interest rates.

In order to curb the vicious payday loan cycle that households can get trapped in, 22 states have limited or banned the practice altogether.

Credit cards, on the other hand, allow you to borrow money — your line of credit — from a lender in order to make purchases or to access cash. Unless you pay off your monthly balance in full each month, interest will accrue on the amount of debt that you carry forward. The interest rate will vary depending on your credit score, which includes your payment history, credit utilization ratio (the amount of debt you carry versus your credit line amount) and other factors.

Using a credit card responsibly — by always making your monthly payments on time — will help you build your credit score and make it easier to obtain credit in the future.

Pay off the payday loan, then the credit card

You may want to eliminate the credit card debt first, but payday loans are the priority. Here’s why:

  • When you have a mix of debt, it’s best to pay off the source with the highest interest rate. Even if you think you have a high rate on your credit card — up to 30% in some cases — payday loans are still worse. You can have a payday loan with an APR from 390% to more than 530%!
  • Payday loan fees are much worse than credit card fees — they can range from $10 to $20 per $100 borrowed for two weeks. You can rack up fees much more quickly with payday loans than you can with credit cards.
  • Your credit score could be damaged if you default on a payday loan. Your debt could go to a collections agency and that would be reported to each of the three credit reporting bureaus. That would make it even more difficult to get credit cards or other loans in the future.
  • Unlike credit card companies, most payday loan lenders won’t let you consolidate your debt.

Keep current on all debt obligations

You may need to prioritize one debt over another, but that doesn’t mean you can slack off on any. It’s crucial to make timely payments on all your debt.

If you have debt from multiple credit cards, it may make sense for you to consolidate the accounts. You can use a zero balance transfer credit card to move all of your credit card debt onto one card with a promotional 0% APR. You can then make one payment covering all of your credit card debt without accumulating interest for a period of time.

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