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Pay Off Credit Card or Auto Loan First?

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

I have about $17k, in credit card debt, and I just got a return of $17k on an investment. My wife and I are in need of a second car. Should I pay off all my credit cards and finance the car, or should I put the $17k toward buying a car?

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Bill's Answer
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Highlights

  • Prioritize paying off your highest interest debt first.
  • Avoid accumulating new debt once you pay off your old debt.

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

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13 Comments

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  • MC
    Dec, 2012
    Mark
    C/o Albany, NY
    Hello! I am applying for a VA home loan soon. Unfortunately, my fiancé can't be a co-borrower because we aren't married and she isn't a vet. My auto loan is $273/month, and the balance is roughly $7,000. Here's the issue: since we can only use my income from my primary job (have been at part time job >2 years), I'm afraid we aren't going to qualify for enough $ for the type of home we are looking for. If I am able to pay down my auto loan to where there are 10 or less payments, then I don't have to calculate the $273/month on me DTI ratio, thus allowing me to qualify for more money. I also have a total of $8,238 in cc debt spread over two cards. I was planning on paying off my cc's in full my 03/15/2013. What should I do?? Stay on track with the cc's, or take $4k to pay down the auto loan, and $4k to pay down the cc's?? Thank you!
    0 Votes

    • BA
      Dec, 2012
      Bill
      Mark, I think that you should work in concert with a loan officer who has lots of experience with VA loans, running the different scenarios. It is my guess that your required minimum payment on your credit cards (likely 3-4% of your balances) are in the range of your car payment. Therefore, you would get roughly the same effect by paying off either debt.

      Perhaps paying off the debt with the highest interest rate would be wisest. In terms of buying the house you want, is it worth waiting until you and your fiancee are married, so her income would be included?
      0 Votes

  • GS
    May, 2011
    Gina
    Catlettsburg, KY
    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.
    0 Votes

    • BA
      May, 2011
      Bill
      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.

      0 Votes

  • 35x35
    Oct, 2010
    Jack
    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.
    0 Votes

    • TB
      May, 2011
      TBank
      New Castle Hundre, DE
      Do you owe taxes on the reduced amount?
      0 Votes

    • BA
      May, 2011
      Bill
      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.
      0 Votes

  • BA
    Sep, 2010
    Bill
    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.
    0 Votes

  • 35x35
    Sep, 2010
    Richard
    have a poor cd that returns peanuts,thinking i should pay off cards then pay back savings we are talking 50000
    0 Votes

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