Q: I just graduated college and have a full time good-paying job. During college I had some credit cards and my father got into trouble and needed to use my cards until he got back on his feet. Long story short, the cards were maxed out and he’s helping me pay them back but at this time two of the card accounts are closed. One of the companies put me on a program where they charge me 1.25% APR until I pay it all off. I owe roughly $4,000 on that card.

Work’s been good and I got a huge bonus this year and want to pay it all off now. My question is, should I pay off my student loans which have a 7% interest and pay installments on this 1.25% credit card that is closed, or should I just pay off the $4,000? The card account is closed so I am not sure if it is better or not just to pay it off in full and be done with it, or just pay off a couple hundred a month because of the low interest rate. Which should I go with?

Option 1:
Pay off $4,000 at once on a closed card with 1.25% rate

Option 2:
Pay off a few hundred bucks a month on the 1.25% closed credit card, and use my bonus money to pay off my school debt.

Thanks for the help!

A: Congratulations on your graduation from college and on the new job! I also commend you for your decision to get your debt under control. That’s an important step toward financial responsibility and independence. You mention that you had several credit cards and some college loans, but you only provide the interest rate on one credit card and the college loan.

In general the rule is to pay off your debt with the highest interest rate first. If your other credit cards have higher interest rates than 7%, you should tackle them first and get them paid off. At the same time, you obviously have to continue to pay the required monthly payments for your college loans and your other credit cards so you do not incur late fees or charges for those.

Going forward, you should also limit the number of your credit cards. The more credit cards you have, the greater the temptation to spend and run up balances. I have managed to go through life with one and sometimes two credit cards at a time and that has been quite sufficient for my needs.

I would also like to say a few words about the impact of credit card and other debt on your future. If you (or someone else) accumulate large amounts of debt in your name, pay late, or miss payments, that may affect your ability to secure debt for some of the things you really want at some point in the future, i.e. a car or a house. You should also be aware that, increasingly, employers are checking credit histories of potential employees. The implicit assumption is that someone who isn’t responsible about paying off debt won’t necessarily be a responsible employee either.

In conclusion, you are taking the right steps in working to pay down your debt. Pay off the highest interest rate debt first, reduce the number of your credit cards, get the balances down to the point where you can pay them off every month, and recognize the possible consequences of taking on someone else’s debt in your name.

Answer provided by Dr. Susan Coleman, Professor of Finance at the University of Hartford and Educational Advisor to The Hartford’s Playbook for Life program. To download or request a Playbook for Life and get more tips on everything from taxes to insurance to evaluating job offers, visit www.playbook.thehartford.com.