Should you pay off a personal loan or credit card first?

Interest rates

First and foremost, most experts recommend that you pay off the debt with the highest interest rate first. Generally speaking, the interest rate for credit cards is usually higher than for personal loans. Even if your personal loan debt is larger, if your credit card purchase rate is much higher than your loan rate, it’s likely to snowball out of control faster. 

Fees and charges

Both credit card and personal loans typically come with ongoing charges over and above the interest. Some credit card fees include annual fees, late payment and cash advance charges, and international transaction fees. Additional personal loan fees include establishment charges, early repayment penalties, ongoing monthly fees, and late payment charges. 

Adding the interest cost and other charges to calculate the comparison rate can help you make an informed decision. For example, if your credit card annual fee is almost as much as your personal loan repayments, it could make sense to pay this debt off first so you can close the account and balance your budget.

If you’re still not sure how to approach this, it’s worth considering some popular strategies for repaying multiple debts. There are two methods you can adopt to repay your loans, which are:

Snowball repayment

The first step is to list down all your loans, starting from the biggest to the lowest outstanding amount. In this strategy you would focus on repaying the smallest loan first, meanwhile you would make minimum repayments on the largest loans as you chip away at the smaller debts. 

The primary objective is to repay the smallest debts as quickly as possible with any extra cash available in your budget. Once they are fully repaid, you could focus on closing the next smallest loan and continue this cycle until all your debt has been paid off. 

Avalanche repayment

In this method, you list down your loans from the most expensive to the least expensive. You then pay the minimum dues on the least costly loan and increase the instalments on the most expensive loans. This method allows you to reduce the total interest costs, resulting in significant savings over the long term.