If one of your New Year’s resolutions is to pay down your debt, you are most likely researching ways to do just that. A question that may come to mind is which should be paid down first, your credit card debt or installment loans, which include mortgages, car loans and student loans.
Many financial experts say that credit card debt—even if that debt is on a balance transfer credit card—should be a priority over paying down an installment loan.
An installment loan is paid in equal monthly amounts. Credit card debt carries a monthly minimum payment that can fluctuate according to the outstanding balance on the account. But many consumers try to pay off their credit card balance each month, or at least make more than the minimum payment.
Focus on credit card debt first
There are several good reasons for prioritizing your credit card debt over an installment loan. The first relates to your credit score. When you pay down your credit card debt, you are reducing the amount you owe and increasing the amount of credit available to you. This translates to a higher FICO score.
While paying your installment loan on time will reflect well on your credit report, it will not have as large an impact, according to credit reporting agency Equifax. Instead, steadily paying your installment loan throughout the life of the loan will prove more beneficial, Equifax says. In addition, making monthly, on-time payments on an open account will count higher than having made payments on an account that is now closed.
In addition, if you look at your credit card statement and compare it against your mortgage or auto loan bill, one number will jump out at you—the interest rate. In general, your credit card will have a much higher interest rate than your installment loan—in many cases at least 10% higher. This is another good reason to pay down your credit card debt first.
With a mortgage installment loan you also may be eligible for a tax benefit in the form of deductible interest. You can’t earn tax benefits from your credit card debt.
Finally, if you recently transferred your debt to a 0% APR balance transfer credit card or are thinking about taking advantage of a balance transfer credit card offer, you’ll want to pay off the balance before the 0% offer expires. If you don’t, you will have lost out on the money you were saving under the 0% APR.