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Should you pay off Credit Card or Loan first?

Unsure whether to pay off credit card debt or loans first? We cover factors that can affect which debt to prioritize and the options available.
A man sitting on a bank card.

When it comes to debt, it’s difficult to know what type of debt is the most important. Should you pay off a credit card or loan first? Is there one debt that affects your credit score more? Is there one debt that affects your financial health more? We look at the differences between credit card debt and personal loan debt.

Which debt should you pay off first?

If you have several debts, loans, and credit card debt, to repay, it can be difficult to know which debt to pay off first. But don’t let that question stop you from paying back your debts.

Debt can mount up, especially if you’re adding the interest rate and any other charges you might be paying out to keep a loan or credit card open.

Credit card debt vs personal loan debt

The key difference between credit card debt and loan debt is that a loan is a lump sum that you borrow all at once, whereas a credit card allows you to continuously borrow credit as you pay it back.

This means credit cards allow you to borrow further credit as long as you’re not over your credit limit but with a loan you would need to reapply or apply for a new loan.

Looking at which debt should you pay off first, whether it’s a credit card debt or a personal loan isn’t going to be the main factor. There are other things you need to consider when choosing which debt to pay off first.

What you should pay off first is going to depend on several factors, such as:

  • The interest rates
  • The amount of the debts
  • What the minimum monthly payments are
  • If you've gone over your credit limit
  • How much you can afford to pay back

The first step to repaying your debts is to know what debts you have, how much they are, and how much the interest rate is. It’s important to know where you stand before choosing a debt solution.

There are different options for tackling your debts. Each method can help you to manage your monthly repayments and which one to choose depends on your personal financial circumstances and spending habits.

Option 1: Pay off the highest interest rate debt first

A woman with a pen and a calendar.

Paying off the highest interest debt first is known as the Avalanche Method.

A high interest rate can make all the difference when you’re repaying your debts, whether that’s credit card debt or loan debt. If you’re paying maximum or very high interest rates, your minimum monthly payment might only cover the interest, and then you’re not even paying back what you owe, simply maintaining the debt balance.

Therefore, it could be a good idea to pay off credit with the highest interest rate first.

  • Pay off the minimum payment towards all your credit cards or loans
  • Use any left-over money to pay off more on your highest interest rate debt

This option should mean overall you’re paying less interest and it will cost you less overall to repay your debts. So, if your number one objective is to save money then this could be the right option for you.

However, it only works if you have enough money to repay the minimum amount on each loan and have some left over.

Option 2: Pay off the smallest debt first

Paying off the smallest debt first is called the Snowball Method. This option can be appealing if you want to see progress quickly.

  • Pay off the minimum amount for each debt per month
  • Any left-over money goes towards your smallest debt

Paying off the smallest debts in order will mean you’re closing debts quickly, but the progress will slow down once you reach your larger debts.

These methods are typically used for paying off several credit card debts, but they can work for any kind of debt.

Option 3: Consolidate your debts

A Debt Consolidation Loan can enable you to combine all your debt payments together to pay them off in one single monthly repayment instead of several.

Debt Consolidation Loans can be a smart way to pay off credit card debt and personal loans at the same time. You take all your unsecured debts and pay them off using a Debt Consolidation Loan, and then you just make one monthly repayment to your debt consolidation loan provider.

Consolidating your debts with a loan could reduce the overall interest you’re paying depending on the APR offered.

Consolidate Your Debt

Alternative options

Money transfer credit card

A man holding a bank card.

If you’re struggling to meet credit card debt repayments or using your overdraft each month to manage debt, you could consider a money transfer credit card.

Usually, you’ll get an interest free period in which you can transfer money without paying interest. However, you’ll probably be charged a transfer fee of 1-4%.

Money transfers can help you to repay debts with less interest but don’t reduce your number of payments per month.

Balance transfer credit card

You could also consider a balance transfer credit card if you’re struggling with credit card debt.

A balance transfer credit card can be a good option if you just have one credit card and pay high interest rates.

Like with a money transfer credit card, you should get an interest free period, but you’ll probably have to pay a balance transfer fee.

It’s also worth noting that with a money transfer credit card and a balance transfer credit card, interest charges will apply after your promotional 0% interest rate ends.

Individual Voluntary Agreement (IVA)

An IVA is a formal agreement between you and your creditors to pay back one monthly repayment towards your debts. Through an IVA company, you’ll create a repayment plan and then they’ll propose that to your creditors. If you’re creditors agree to the terms, then you’ll pay back a reduced monthly payment.

An IVA allows you to write off your remaining debt after the period has ended – this is usually 6 years. Although debt write off can be appealing, an IVA may not be the fastest way to repay your debts. So, if your objective is to repay your debts as fast as possible, it might not to the option for you.

However, it’s important to be realistic with yourself, and if you’re struggling to meet payments, you may need to come to terms with it taking a while to repay your debts.

Important note:

An IVA is a type of insolvency and will affect your credit score. An IVA would be on your credit report for 6 years from the date it starts. Please consider this when looking into an IVA as an option for you.

A man in front of a board with Debt Consolidation written on it.


Key points to take away:

  1. Get organized - write down all your personal loans and credit card debt
  2. Choose a debt method that works for you - be realistic, can you afford to deal with your debts without a debt solution? And what's your main objective when paying off credit?
  3. If you're not sure what debt method is best for you, speak to a financial expert

If you’re struggling with credit card debt and personal loans, it might be worth considering a Debt Consolidation Loan.

Debt consolidation loans can help you to consolidate existing debt such as unsecured personal loans, credit card debt, payday loans, and more.

Fill in our online application today to see if you qualify.

Apply Now
An advisor pointing to a screen displaying Rep APR.

APRs from 5.8% to 89.9%

We are a broker, not a lender.

Unsecured Loan Representative 69.9% APR

Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.

Secured Representative 11.7% APR

If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.

Further reading

What are the Different Kinds of Unsecured Loans?

Understand what an unsecured loan is, and how best to use the different kinds of unsecured loans in 2023.

What are the Different Types of Secured Loans?

With so many different types of loans available, it can be difficult to know which is right for you. For more information on secured loans, read this expert article.

Persistent Debt – What Does it Mean for Your Credit?

Persistent debt can affect your credit rating for a significant time period. Read to find out more.