why you should pay off credit card debt first
Since your credit card probably charges higher interest rates than your car loan, it’s a good idea to pay off your credit card debt first.
credit cards have variable interest rates. These interest rates shift up and down depending on the prime rate. Currently, the average credit card interest rate is a variable 17.36 percent. Auto loans, on the other hand, tend to have fixed interest rates, meaning that whatever interest rate you’re offered at the beginning of your loan remains unchanged for the life of the loan. auto loan interest rates tend to hover around 4 percent.
If you’re racking up more interest on your credit card balances than on your car loan, it makes sense to pay off your credit card debt as quickly as possible. You don’t want to pay more interest than you owe, do you?
Here’s one more good reason to pay off your credit card debt first: As you pay off your credit card debt, your credit utilization ratio will go down and your credit score should go up. Credit utilization refers to the amount of credit you are currently using compared to the amount of credit available to you, but it only applies to revolving debt, like credit cards, not installment debt, like installment debt. car loans.
Believe it or not, having an unpaid car loan on your credit report can actually benefit your credit score. That’s because the three credit bureaus (Equifax, Experian, and Transunion) like to see that you can handle a mix of credit, both revolving debt and installment debt. Making regular car payments while paying off your credit cards can be a smart move, credit score-wise.
Also, some auto loans come with a prepayment penalty if you try to pay them off early. That’s another good reason to pay off your credit cards instead of trying to pay off your car loan early.
why you should pay off your car loan first
If your car loan balance is significantly less than your credit card debt, it might make sense to pay off your car loan first. that way you can own your car for free and clean while you focus on paying off your credit cards.
Owning your car also makes it easier to sell or trade it in for another vehicle. If you’re thinking of trading in your current car for a newer model, paying off your current car loan first will prevent you from having to transfer money you owe from your old car to your new car loan.
If your car loan has a variable interest rate instead of a fixed interest rate, it might be a good idea to pay off that loan before interest goes up. But keep in mind that even auto loans with variable interest rates are likely to charge less interest than credit cards.
how to choose whether to pay the credit card or the car loan
If you’re not sure whether to pay off a credit card or a car loan first, Bankrate offers a debt payoff calculator that can help you make an informed decision.
Simply enter the amount of each debt, its interest rate and your minimum monthly payment. then enter the amount of additional money you can put toward your debt each month and your annual income/tax level, and the bankrate calculator will tell you which debts to pay off first and how much money to put toward each debt. If you have multiple credit cards with different interest rates, the calculator will even tell you which card to prioritize.
As you work to pay off your credit cards and car loan, check out this calculator to make sure you’re still on the right track. keep updating it with your current balances, interest rates, and payment plans, and you can follow a debt payment plan optimized just for you.
alternative options to pay the debt
If you’re hoping to pay off your credit card debt as quickly as possible, a balance transfer credit card can help you consolidate your credit card balances. The best balance transfer credit cards offer 15 to 21 months of zero percent APR, giving you plenty of time to put a dent in that debt — or pay it off in full.
You might also consider taking out a personal loan and using that money to pay off your credit card debt. Like auto loans, personal loans tend to have lower interest rates than credit cards, making them a great debt consolidation option.
If you want to lower the amount of interest you’re paying on your car loan, or simply lower your monthly payment, you can refinance your car loan. You could also transfer your car loan to a credit card, but that option carries some risks and may not be the best way to pay off your debt.
the end result
In most cases, it’s better to put extra money toward your credit cards instead of your car loan. credit cards are more volatile than auto loans and typically charge more interest; Plus, you’ll probably get a bigger boost in your credit score when you pay off your credit card balances.
If you only have a little money left on your car loan, or if you plan to sell or trade your car in the near future, it might be smart to pay off your car loan before your credit cards; Otherwise, focusing on paying off your credit card debt as quickly as possible is generally the way to go.