Saturday, December 3, 2022

Should I Pay Off My Loan Or Credit Card First

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Why You Should Pay Off Credit Card Debt First

#AskSusie – Should I Pay Off My Credit Card or Loan Debt First?

Since your credit card likely charges higher interest rates than your car loan, its a good idea to pay off your credit card debt first.

Credit cards have variable interest rates. These interest rates shift up and down depending on the prime rate. Currently, the average credit card interest rate is a variable 17.36 percent. Car loans, on the other hand, tend to come with fixed interest rates, which means that whatever interest rate youre offered at the beginning of your loan remains unchanged for the life of the loan. Auto loan interest rates tend to run about 4 percent.

If youre running up more interest on your credit card balances than you are on your car loan, it makes sense to pay your credit card debt off as quickly as you can. You dont want to pay any more in interest than you have to, right?

Heres one more good reason to pay off your credit card debt first: as you pay off your credit card debt, your will go down and your credit score should go up. Credit utilization refers to the amount of credit you are currently using versus the amount of credit available to you, but it only applies to revolving debt like credit cards, not installment debt like car loans.

Plus, some car loans come with a prepayment penalty if you try to pay them off early. Thats another good reason to pay down your credit cards instead of trying to pay off your car loan ahead of schedule.

Ask About Hardship Programs

Credit card issuers have hardship programs designed to help people who find themselves unemployed or experiencing another kind of unexpected financial strain. Many of these programs include , in which card issuers waive payments for a set period of time. If you are in the middle of a financial crisis, calling your credit card issuer and asking about hardship programs can help you avoid getting into unmanageable credit card debt.

You May Have Smarter Money Options

If your personal loans interest rate is lower than the rates youre being charged on other types of debt, your money may be better spent elsewhere. Instead of paying off your personal loan early, you could focus instead on paying off higher-interest debt, like a credit card balance, which could save you more in the long run. You could also consider beefing up your retirement plan contribution at work in order to be eligible for an employer match or contributing money to a high-yield savings account. And of course, before making changes to your monthly contributions or paying off a personal loan early, check your bank accounts and make sure you have the funds to cover both your anticipated monthly expenses and unexpected emergencies. Preparing for the future could save you a whole lot of stress.

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Debt Snowball Or Avalanche

You may also decide the best way for you to tackle your credit card debt is by focusing extra payments on one of your cards. There are two primary ways people go about this: either the debt snowball or debt avalanche method.

The benefits of using one of these methods include:

  • Avoiding new credit lines. If you dont have great credit or dont want to take on additional debt, these methods let you focus on paying down your debt with what you have, not adding to your burden.
  • Focusing on high interest. With the debt avalanche method, you pay off your debt with the highest interest rate first. This could save you more in the long run.
  • Focusing on little wins. The debt snowball method focuses on paying off the debt with the lowest balance first. If you need a quick win, this might be your best bet.

Of course, these payoff methods also have their drawbacks. You may find:

  • Its a slow process. Increasing your payments with only the cash you have on hand right now means you may pay off your debt slower compared to a personal loan.
  • Your budget doesnt work with it. If your budget is already stretched thin as it is, you may not have any extra money to put toward higher credit card payments.

Overall Better Financial Strength

Should I get a personal loan to pay off my credit card?

Saving money may be the most obvious benefit to paying off loans early, but its not the only one. It can enhance your financial strength several ways.

Money that once went to monthly payments can be used elsewhere, such as paying off other debts, saving it or purchasing items you previously couldnt afford.

It also makes you more likely to be approved for a new loan because it improves your debt-to-income ratio. Thats something lenders look at to make sure you can repay them, and money youre spending on other loans is money you cant spend on new ones.

Should you seek another loan, you may get a better rate because paying down debt can improve your credit score. One factor in credit scoring is how much you currently owe. Paying down debts increases how much you are capable of borrowing.

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Take On A Side Hustle

If you’re struggling with debt, you have undoubtedly already considered earning more money. Here, we’ll cover a few ideas that won’t eat up all your spare time, but will add extra cash to your monthly budget:

  • Sell things you enjoy making anyway. For example, if you are a woodworker who makes address signs or a knitter who creates adorable baby sweaters, sell them on sites like Etsy.
  • This isn’t a side-hustle, but if you’ve been meaning to clean the basement, attic, or garage, sell anything of value that you don’t use on a regular basis. You may be surprised by how much money you have lying around the house.
  • Offer a “homework hour” . You know how tough it can be to get your own children to do their homework, so make it a community effort. For a fee, allow parents to drop their kids off at your home — or log into a Zoom with you and some other neighborhood kids — for one hour after school each day. Your role is to oversee their homework, answering questions as they arise.

Monitor Your Credit Score And Credit Card Fees Before You Close A Credit Account

As you pay off your credit cards, take care to closely monitor them, as even credit card accounts with no balance can accrue annual fees and other fees.

However, keeping your credit account open and using it to pay off purchases can drive your credit score higher, while closing accounts reduces your and average age account .

Ideally, as your credit cards are paid off, keep them open if their annual fees and other fees are minimal and if you are not planning on using the card to accumulate debt again. If you do choose to close the account entirely, consider only doing so after you have monitored the balance and your associated credit score for a few months.

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I Have $7100 In Credit Card Debt And Almost All Of My Cards Are Maxed Out How Do I Decide Which Card To Pay Off First Anonymous

There are a couple different ways to tackle credit card debt.

While you’ll want to keep paying at least the minimum required on all cards, you’ll need to decide where extra money will go.

Some people recommend focusing on the card with the highest interest rate first. Others suggest prioritizing the card with the smallest balance.

But which approach is right for you?

Before you get started, take a look at some of the questions below. Then, you can plan out your repayment strategy and hopefully avoid a similar situation in the future.

How To Calculate Which Credit Card To Pay Off First

Should I take a personal loan to pay off my credit cards?

When you’re ready to pay off your credit cards, selecting the right credit card to pay off first may help you build a strong debt repayment strategy, as well as help you plan for credit card usage in the future.

There are a number of simple ways to insert a credit card debt repayment strategy into your life. Ahead, you’ll find a few different methods that may help you decide which credit card balance to pay first and some factors to consider when implementing one of these methods into your financial goals.

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Sign Up With A Debt Settlement Service

If you dont think youll ever be able to pay off your credit card debt in full, a debt settlement service can help you negotiate a settlement with your credit card company. Debt settlement companies often come with hefty fees, and settling your debt instead of paying it off in full could damage your credit score. However, debt settlement is one way of dealing with the kind of credit card debt that you can no longer manage on your ownso add it to your list of options.

Should You Pay Off Your Car Or Invest

Whether you should pay off your car or invest depends on the loan’s interest rate and your overall financial situation. Paying off the loan early gives you full ownership of your vehicle, which can come in handy if you need to sell it quickly. If you have high-interest debt, you may want to pay that off before you pay off your car or invest. If your car loan has a high interest rate, it would make sense to pay it off before you invest.

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Pay More Than The Minimum

Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal. Before you begin, check the terms of your loan to determine whether additional fees or prepayment penalties may apply.

Pay More Than Once A Month

Should I pay off my debt or save for emergencies first ...

Pay your credit card bills more than the required once per month. This may make it easier to stay on track of how much you owe. Paying your credit card bill regularly may also lower your balance/utilization ratio. The credit utilization ratio is the percentage of your total available credit that is currently being used. The utilization ratio is one of the components used by credit reporting agencies to calculate your credit score.

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Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

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Whether you’ve been using credit cards for years or you’re applying for your first one, they can be confusing. Depending on how you use them, credit cards can either be incredibly dangerous or immensely helpful. This guide will walk you through what you need to know about using a credit card, building credit and earning rewards.

You Can Pay Off Credit Card Debt In Full

If you have high credit card balances, a personal loan can help you pay off your credit card debt in full. This will not only give you the peace of mind that comes with being out of credit card debt, but might also increase your credit score.

Keep in mind that using a personal loan to pay off your credit card debt isnt the same thing as becoming debt-free. After you pay off your credit cards, youll still need to pay off your personal loan. However, paying off your high credit card balances, and saying goodbye to the high interest charges that accompany them, can be a huge financial relief, and is one of the biggest benefits of paying off debt with a personal loan.

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You May Earn A Lower Interest Rate

You could pay 20% APR or more if you carry a credit card balance, although borrowers with excellent credit could pay roughly 12% to 17%, depending on the type of card they own.

Personal loans, on the other hand, charge an average interest rate of less than 10%. The best personal loans are even cheaper than that if you have a high credit score. That means you could cut your total interest payment in half and even pay off your debt sooner since youll be paying less in interest.

You Should Pay Off These Types Of Debts First

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Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.

There are few things as disheartening as finding yourself under a massive amount of debt. Unfortunately, thats an experience many consumers have, whether its maxing out credit cards or financing a new home. So, if you have a few extra dollars in your bank account, you should use them to pay down your loans ahead of schedule, right?

In reality, choosing to eliminate your debt is not so clear-cut. Though some loans are inherently toxic to ones financial picture, other forms of credit are relatively benign. When you consider the alternate ways in which you can spend your excess cash, it might do more harm than good to use it to pay more than your monthly minimum.

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Don’t Close Major Credit Card Accounts

Problem: Logic would seem to be on the side of lowering credit card debt and eliminating unnecessary or unused lines of credit. However and this is where it can get confusing closing a credit card account might have the opposite effect by doing so, you may increase your ratio.

How does closing a credit card affect your credit score and mortgage application? The percentage of available credit is among the top factors that influence your credit score, and ultimately your future mortgage interest rate. Closing unused credit cards reduces access to credit from your perspective, but in closing an account you will have increased your credit utilization ratio from a lenders point of view – and thats a bad thing.

For example, if you have credit card limits totaling $10,000 and balances of $2,000, your ratio is 20%. If you then close a credit card with a limit of $6,000, you just raised your utilization percentage to 50%. That does not bode well for your credit scores, which could complicate mortgage approval, and/or raise your interest rate.

Closing your oldest major credit card accounts is almost always a BIG mistake before buying a home.

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Next Focus On Debt Repayment

Its important to note that your individual debt repayment strategy will vary based on what type of debt you have. If you primarily have student loans, for example, you may be able to look into deferment, forbearance or loan forgiveness through your loan provider. If you are mostly dealing with credit card debt, these solutions will not be available.

Regardless of what kind of debt you owe, there are two common strategies for repayment: the snowball method and the avalanche method. Both will ultimately help you reach debt-free living but in slightly different ways.

The snowball method consists of listing your debts by total amount and paying off the smallest ones first, slowly working your way up to the most expensive. This strategy is more focused on the psychological benefits of paying off debt. Many people find that the satisfaction you feel when paying small amounts first is highly motivational and helps lessen the emotional burden of debt.

With the avalanche method, you rank your loans based on interest rates, rather than by the total dollar amount. Then you focus on paying off the balances with the highest interest rates first, while continuing to pay the minimum each month on all other loans. This can be particularly helpful if you have credit card debt in addition to student loans or other types of loans, as interest rates are typically higher on credit card accounts.

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