JACKSONVILLE, Fla. – Between stimulus payments and a pause on student loans, many of us were able to pay down our credit card balances over the past year.
Last year Americans paid off 82.9 billion in credit card debt according to Wallethub.com
One reason for that is that 20 million people still have student loans in forbearance. Plus, with most vacations, dining out and other discretionary spending cut back or even suspended during the pandemic, those of us who stayed employed were using those charge cards less.
Between credit card debt, auto loans and student loans, which should you be paying down right now?
“You should always start with whatever has the highest interest rate. For example, if you have a credit card that’s got an interest rate of 0% or 2%, I wouldn’t pay that first,” explained CPA Michelle Cagan, the author of Debt 101.
But most credit cards are in the double-digits -- ofter 18% or even higher. With student loans are still in forbearance, your credit card will have the highest interest rate.
Once that’s paid off, what should you turn to next, student loans or auto loans?
“I would say auto loan because while your car can be repossessed your education can’t,” Cagan said.
A 2018 Federal reserve study found that 40% of Americans would have trouble coming up with enough cash to cover a $400 emergency expense. Financial experts recommend having enough savings to cover three to six months of expenses, but don’t let that scare you.
Cagan said you should start small.
“Instead of aggressively paying off debt, I might want to build up some emergency savings or some other financial resource first because that way you won’t have to go more into debt if something else happens. So, at the same time pay down debt at a normal rate, beef up savings if you don’t have any.”