Which debt to pay off First: Credit Cards vs. Installment loans

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Which Debt to Pay Off First: Credit Cards vs. Installment loans

When you’re paying down loans as well as credit card balances, concentrate on your primary credit card balance -but with one exception.

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Aug 5, 2021

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years at The Oregonian in Portland in capacities such as chief of the copy desk and team leader for design and editing. Previous experience included copy and news editing for various Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in mass communication and journalism in The University of Iowa.

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If you’re in the process to pay off installment loans, you may be wondering which to focus on first. Here’s what you need to think about about the repayment of your credit card debt and your installment loans.

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Prioritize credit card debt first.

There are many positive reasons to prioritize your credit card debt prior to the installment loan like car loan, mortgage or student loans:

Build your credit score

The first one is related to your credit score. When you pay off your credit card debt you are reducing the amount you owe and increase the quantity of credit that is available to you. This means less — and because utilization is among the most important factors in your score, this could lead to a higher Score on FICO, or the VantageScore.

When you pay off your installment loan on time reflects well on your credit report- but it doesn’t have as large an impact as lowering credit utilization.

Your credit score is based on whether you have various types of credit open. In addition, having some instalment loans (in conjunction with revolving credit such as credit cards) and steadily paying them through the term of the loan can help .

Concentrate on interest rates to you can save money.

If you examine your credit card statement and then compare it to your mortgage or car loan bill, one number will pop out at you — it’s the amount of interest. In general, a credit card will be much more expensive in terms of cost of borrowing than an installment loan which is in many instances, at minimum 10% more (but make sure to verify this). Another reason to settle your credit card debt first.

Remember tax benefits

If you take out a mortgage installment loan You may also be qualified for tax benefits in the form of deductible interest. Tax benefits aren’t earned through the credit card debt.

Keep an eye on the calendar

In the end, if you’ve transferred your debt to another or you are contemplating making use of the balance transfer credit card offer You’ll need to settle the debt before the offer of 0% expires.

A few exceptions: If the loan is one that is a payday loan

Lenders offer as a short-term solution for those who’s cash isn’t available. There’s no credit checks required and, in most cases, you’ll be approved for an payday loan quickly. But this easy-to-get money is expensive typically as a result of high charges and triple-digit interest rates.

It is always a priority to eliminate payday loans. Here’s why:

It’s best to pay off your most high interest-rate loans first. Even if you think you have a high rate of interest on your credit card payday loans are still more expensive. The cost of payday loans can be as high as payday loan can translate to an APR of 390 percent and even 600%.

Payday loans can lead to the creation of a spiral of debt. If you aren’t able to pay the full amount on your day of your first pay date, a finance charge is added and the cycle continues. Within a few months, you could end up owing more in interest than the original loan amount.

Unlike credit card companies, most payday loan lenders won’t let you consolidate credit card.

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