Select Page

The average American owes more than $6,000 in credit card debt. Credit cards can be your saving grace in times when you need quick and reliable cash, but they can also be your downfall if you run into debt problems along the way. If you are looking to pay off your debt, you are probably researching different ways to lessen the amount that you owe. Unfortunately, there may be a pressing question that is hindering you from making a move: should you pay off your credit card debt first or your installment loans, such as your car payment, student loans and mortgage?

In general, paying off your credit card debt first is a wiser choice because the interest rates are so high. A typical credit card has an interest rate of about 15 percent and when you start to become past due on your payments, your dues increase to a significant amount. Some credit card companies will even increase your interest rate if you’re consecutively late on making payments.

Another point to consider is that your installment loans are paid in equal monthly increments and rarely increase. Credit card debt often carries a monthly premium that fluctuates according to any outstanding balance that is found on the account. This is why it is crucial that you pay more than the minimum amount due each month to start tackling the debt itself.

Focus on Credit Cards First

There are a myriad of good reasons for making your credit card debt a priority over your installment loans. For one, you’re able to improve your credit score by making minimum payments on your account. Each time you make a payment to tackle that outstanding debt, you’re increasing the amount of available credit. This means you’re lowering the amount of credit you’re using against your score, which results in a higher FICO score. Paying an installment loan is great for your credit report and looks good to future lenders, but it doesn’t do much as far as impacting your credit utilization.

Also, your FICO score accounts for every single credit card that you have open. If you have multiple outstanding credit cards, your score will decrease significantly because so much credit is being used in your name. Having a couple of installment loans and steadily paying them off each month allows you to have access to better rate cards, thus lowering your overall dues because you’re getting access to lower interest rates.

Focus on Interest Rates

One number will jump out at you when you compare your credit card statements with your mortgage or auto loan bill: the interest rate. Unless you have an excellent credit score and are with an amazing company, chances are pretty good that the interest rate on your credit card account is double what you have on any other loan in your name. Because of this reason, you need to tackle the credit card debt before anything else for no other reason but to get rid of the ridiculous interest rate you’ve been paying.

You can try to negotiate with your credit card company to lower your rate, but this may be short-term and still higher than what you pay on your installment loans. Keep in mind that if you have debt, you can’t simply close out your account and hope it goes away. You may not have access to your available credit anymore, but you’ll still be hounded down by creditors looking for you to pay.

Tax Benefits

Many mortgage loans and automotive installment payments allow you to take advantage of tax benefits and write-offs at the end of each fiscal year. This comes in the form of deductible interest and can be quite a large amount when you receive your tax refund after filing. Credit cards, on the other hand, don’t offer any tax benefits to those who have outstanding accounts. Because of this reason, you should get rid of your credit card debt first before tackling those installment loans.

If you recently transferred your credit card debt onto a lower 0% new member account, you need to get rid of the debt before this introductory period expires. It’s never a good idea to be in debt on one credit card only to transfer it to another and deal with the same headache.