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Should you pay off credit cards or loans first?

ByCindy J. Daddario

Mar 9, 2021

When paying off credit cards and installment loans, you may be wondering what to focus on first. So, you should think about paying off your credit card debt and your installment loans.

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Focus on credit card debt first

There are several good reasons to prioritize your credit card debt over an installment loan such as a car loan, mortgage, or student loan:

Build your credit rating

The first is related to your credit rating. When you settle your credit card debt, you reduce the amount you owe and increase the amount of credit available to you. That means lower Credit utilization – and since utilization is one of the biggest factors in your score, it can lead to a higher FICO score or VantageScore.

Paying your installment loan on time will be reflected well on your credit report – but it won’t have as much of an impact as lowering your loan utilization.

Your creditworthiness also takes into account whether you have different types of credit open. Having some installment loans (in addition to revolving loans like credit cards) and paying them off continuously throughout the life of the loan will help Your creditworthiness.

Focus on the interest, save money

Also, if you look at your credit card statement and compare it to your mortgage or car loan bill, you will notice one number – the interest rate. In general, a credit card has a much higher interest rate than an installment loan – in many cases at least 10% higher (but check for security). This is another great reason to pay off your credit card debt first.

Think about tax benefits

With a mortgage installment loan, you can also get a tax break in the form of deductible interest. You cannot get any tax breaks from your credit card debt.

Look at the calendar

Finally, if you recently dropped your debt on one 0% APR credit transfer credit card or if you are considering using a credit card offer with a credit transfer, you should settle the balance before the 0% offer expires.

One exception: if the loan is a payday loan

Lender Offer Payday loan as a short-term solution for consumers when cash is tight. There is no credit check and you can usually get approved for a payday loan quickly. But this easy-to-get money comes at a high price, mostly in the form of exorbitant fees and triple-digit interest rates.

Always prioritize getting rid of payday loans. Here’s why:

  • It is best to pay off your debts with the highest interest rate first. Even if you think that you have a high interest rate on your credit card, payday loans are even worse. The interest on a payday loan can be an APR of 390% and sometimes up to 600%.

  • Payday loans can lead to a spiraling debt. If you cannot pay in full on the first payday, a new financing fee is added and the cycle repeats. Within a few months, you could be owing more interest than the original loan amount.

  • Unlike credit card companies, most payday loan lenders do not let you consolidate your debts.

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