Home / Featured Articles / What to pay down first: your credit card, or your car loan?

Weekly Tips

What to pay down first: your credit card, or your car loan?

Determining which of your debts to pay off first can be tricky. Sure, it might seem like paying off your car loan and finally owning that car, paid-in-full, is the right idea. But the answer really depends on what your interest rates look like.

First off, you'll want to make sure you're making monthly payments on each. Don't be late on a payment, don't skip a payment - don't do anything that could put your credit score in jeopardy. Now, if you have some extra income on the way (maybe your tax return or a lucrative promotion), then you're in a pretty good spot to make some progress on your active debts. (Also, good job by you!)

So the question is, car or credit card - which to pay down first.

The answer: probably the one you're paying the most interest on.

OK, so we sort of spoiled the suspense in the beginning, but that's the reality. Odds are, you're paying a lower interest rate on your car; the average new car loan, according to BankRate, was 4.12% as of February 14, 2013. The average credit card interest rate that same day was 14.35%, courtesy of LowCards.com.

A 10% difference in interest is no joke, so as much as you'd probably LOVE to pay that car off, you're likely better off applying that extra cash to your credit card bill. Unless...

...You're paying ZERO interest on your credit card bill, which means you're still enjoying the 0% interest intro period attached to your card and probably means you recently made a credit card balance transfer. (Otherwise, how did you rack up that debt so fast? Bad job by you!)

If this is you, then perhaps you should focus on paying down your car loan. However, keep in mind that each month you make a payment on a car is another month that your credit history is extended. So while you don't want to report to the major credit bureaus that you're using a significant amount of your credit line, it's perfectly fine to continue to make the standard monthly payments on your credit card. This is another reason to pay down your credit card first, no matter what your interest rate is.

To sum it up, there are several benefits to paying off your credit card before your car, even if you're not yet paying interest on your credit card. (If you carry a balance, the day will come when you DO pay interest.) That said, no matter what you choose to pay down first, remember to make on-time, monthly payments on each to maintain your credit score.

on Fri, 2013-02-15 16:47