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Which Debts 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 attempting to pay off loans as well as credit card balances, concentrate on the primary credit card balancebut there’s a slight exception.

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Aug 5 2021

Editor: Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, 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. Prior experience includes news and copy editing for several Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in journalism and mass communications in The University of Iowa.

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If you’re in the process of paying off credit cards and installment loans, you may be contemplating which to consider first. Here’s how you should think of getting rid of the credit card debt as well as your installment loans.

Make sure you track your debt the simple way

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Prioritize credit card debt first.

There are several good reasons for prioritizing you credit card balance prior to the installment loan like a car loan and mortgage loans:

Build your credit score

The first relates with your score on credit. When you pay down the credit card debt you reduce the amount you owe , and increasing the amount of credit that is available to you. This means you will have lower debt utilization, and since it is one of the major factors in your score, it could result in a better scores for your FICO or VantageScore.

Paying your installment loan on time reflects well on your credit report -however it won’t make as much of an impact as lowering credit utilization does.

Your credit score takes into consideration whether you have different types of credit open. The presence of installment loans (in addition to revolving credit like credit card) and regularly paying them throughout the life of the loan will assist .

Concentrate on interest rates to reduce your expenses

If you examine your credit card statement and compare it with your car or mortgage loan bill, one particular number will be obvious — that of the rate at which you pay interest. In general the case, a credit card will have a much higher rates of interest than an installment loan — in many cases , it will be at minimum 10% more (but check to be sure). Another reason to reduce your credit card debt first.

Remember tax benefits

If you take out the mortgage installment loan, you also may be qualified for tax benefits through deductible interest. There are no tax benefits by settling the debt you owe on your credit card.

Keep an eye on the calendar

Finally, if you recently transferred your debt to a credit card or you are contemplating using the balance transfer credit card, you’ll want to settle the debt prior to the time that the 0% deal expires.

A few exceptions: If the loan is a payday loan

The lenders offer a short-term fix for consumers when cash isn’t available. There’s no credit checks required and, in most cases, you’ll get the payday loan quickly. But this easy-to-get money comes with a heavy price typically as a result of high charges and triple-digit interest rates.

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

It is best to pay off your most high interest rate loans first. Even if you believe you have a high rate on your credit card, payday loans are still much more costly. The interest on a payday loan can translate to an APR of up to 390% and sometimes even 600%.

Payday loans could lead to the creation of a spiral of debt. If you don’t make payments fully on the initial payday, then a finance charge is added and the cycle continues. Within a couple of months, you may end up paying more interest than the original loan amount.

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

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