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Question:
DEC 12, 2011

Payoff credit card debt or auto loan

Should I pay off all my credit cards before I finance my car?

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Bill's Answer: Bills.com Resident Expert

That is a very good question - which involves relative rates and specifically where the highest return on your money is.

If the interest rate on your credit card debt is higher than the interest rate on your auto loan (which is almost always the situation), then you should pay off the credit card debt. The benefits are less money going to cover interest fees and possibly a lower monthly payment. Ideally, you would use the extra cash flow to pay down the total debt amount faster, getting debt free in a shorter amount of time. Be sure not to "run up" your credit cards once they are paid off!

If you would like more information, please visit us online at bills.com. We have also attached a free guidebook on budgeting and financial planning, including a section on getting debt free.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (11)


Gina S.
Catlettsburg, KY  |  May 16, 2011
Would it be wiser to pay off my credit card or my car loan? The credit card is at a fixed 9.99% rate and the loan is for about 6.5% give or take a bit. I owe about $2900 for each. When my income tax return comes next year, I was going to use that to pay down one or the other. The car payment is about $145 each month, and I will pay $100 per month on the credit card no matter what the minimum payment will be. What should I do? Because I am going to apply for a loan to buy some property and mobile home in the next month or 2. And would like to some extra cash on hand from one payment or the other. Thank you in advance.
Bills.com
May 16, 2011
Ah, this is what school kids call a math "word problem." Your answer is to calculate the cost of each loan from today forward until each debt is paid. Let us look at both:
  • Credit Card. You mentioned a $2,900 balance at 9.9% and a $100 monthly payment. At that rate, it will take you 34 payments to zero the balance, and will cost you about $500 in interest expense.
  • Vehicle Loan. You mentioned the car payment is $145 @ 6.5%, and $2,900 remains on the loan. With these three figures, I estimate you have 21 payments remaining (although this is a guess). If so, you will spend about $150 in interest expense over those 21 months.

The cheapest way for you to debt freedom is to pay off the higher-interest credit card debt as quickly as possible.

Jack .
October 03, 2010
I had accumulated $40,000 in credit card debt and went with debt settlement. They were able to reduce the $40,000, to $18,000 and completely negated my interest rate. Now I make lower monthly payments, and I can actually see my debt go down.
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TBank B.
New Castle Hundre, DE  |  May 02, 2011
Do you owe taxes on the reduced amount?
Bills.com
May 02, 2011
There is much unsaid in your question. Assuming a person with a loan settles with the lender for less than the original contracted amount, the difference between what was originally owed and the settlement amount is considered income. See the Bills.com resources Negotiating Debt and Cancellation of Debt Income to learn more.
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Bills.com
September 21, 2010
I agree that you should not be putting money into a low yield CD or savings, when you have high-interest debt. Paying off the debt is a clear win.
Richard .
September 20, 2010
have a poor cd that returns peanuts,thinking i should pay off cards then pay back savings we are talking 50000
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Bills.com
November 11, 2009
Another way to express the Matthew's point is if a vehicle owner set aside the ~$100/month additional amount that collision insurance costs into an investment account reserved for the repair or replacement of the vehicle, the vehicle owner would be money ahead. There is an opportunity cost of buying collision insurance, especially if the buyer drives infrequently, has a history of safe driving, lives in a rural area, and has the discipline to set aside $100/month as a collision reserve.
LeAnne S.
November 11, 2009
If they are going to be buying a new or newer car, then they will want to have full coverage anyway. I certainly would not want my new car to have liability only. What if they had an accident?
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Bills.com
May 26, 2009
Thanks for the comment, hopefully it will help folks.
Matthew S.
May 25, 2009
I disagree with your recommendation because you failed to take into account insurance premiums. If the owner is comfortable with liability only insurance, and 17k is enough to own the car outright, it would be a wiser choice to buy the car with cash. Having comprehensive insurance is usually at least 100 dollars more a month. If you factor that premium as if it were a finance charge, the auto loan is significantly more expensive to hold. A note should be made that the 17k is taxable income and if the buyer hasn't paid taxes on it yet, he/she should set some of that money aside to pay in April.
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