I’ve got a mortgage, car payment, private loan, student loan, and (finally) two credit cards as my total debt “portfolio.” Thanks to balance transfers, my two CCs have great interest rates - 5.99% and 6.99% respectively, fixed. The two debts with the highest APR are my 15% mortgage loan (8.375%) and car payment (7.99%). I’m making no new credit card purchases, thank God.
My innate, primate instinct is to pay off my credit cards first. It just FEELS right. It’s what everybody always says. But I’m also inclined to pay off the highest APRs first.
So, is there any particular financial reason to pay off my credit cards first, assuming they’re not running the highest interest? Should I be worried about my credit score or something? The biggest risk I can think of is being late on a CC payment and losing my promotional APR. Anything else?
Dave Ramsey says to pay off the lowest debts first, even if they have higher interest rates, because that way it FEELS like you’re making more progress. Even though you may eventually end up paying more, you’ll be more likely to stay on a track to becoming debt free if you lower the number of checks you’re writing every month.
In other words, it’s not the type of debt to pay off first. Instead it’s the debt that causes you the most financial pain, high interest, i.e., regardless of its origin.
That’s what I figured. I was just wondering if there was anything special about credit cards - besides their well-deserved stigma - that would make me want to pay them off sooner.
@Santo: I really like Dave Ramsey. And that trick’s a nice idea, but it’s just a mental trick. More useful for people with serious spending and debt problems. I think I’m over the mental “hump” that I can go by APR instead of balance.
One thing to remember is that if you make advance payments on your home loan or your car loan, you won’t reduce your monthly payment. Instead, the term of the loan will just be shortened (sometimes considerably). On the other hand, if you pay off the credit cards, you’ll get rid of that payment.
Also, your credit card payments may be short-term teaser rates. If you don’t pay them off first, you may get hit by higher regular rates.
Further, you home mortgage interest is likely tax deductible, which can lower the effective interest rate considerably.
Those are the kinds of things I was asking about! Thanks for your points.
(a) doesn’t apply too much, cause we plan on paying the same every month regardless.
(b) is good news, I’ve got fixed rates. If the rates were to go up for any reason, I’d either transfer the balance to a new card, or just switch to paying the card off first.
I will add a third point to paying off the credit cards first. It sort of goes with one of Billdo’s points. The benefits to paying down the mortgage will not be seen for years and years. Basically only when the mortgage is paid off. Hopefully your credit card debt will be paid off in much less than 20 to 30 years. Once credit card debt is paid off you can put that money extra money to short term savings should personal emergencies happen. Like say you loose your job or have big medical expenses. If you put all your money into the house it is much hard to pull out than to dip into emergency savings. If you have savings you can live on for 6 months or more this probably does not make a big difference.
That 15% mortgage is pretty high. I am confused by you OP do you have two loans on the house 15% and 8.375%? If you have a comfortable amount of savings and self discipline paying the highest interest debt off first is best.
To add another point that doesn’t apply to your specific situation (because it sounds like you’re not going to be needing to apply for any loans in the near future), one of the things that goes into calculating your FICO is:
I do have a question for you, though, happywaffle. How the heck did you get such low interest rates on your cards? My main card is at 10.5, and everybody seems to ooh and aww about what a low rate that is.
I missed the issue of mortgage debt vs revolving debt.
I would eliminate the debt with the highest interest rate, outside of any mortgage you may have. As already pointed out the actual mortgage rate may be reduced substantially when you take into account the mortgage interest tax deduction. Let’s also not forget with a mortgage you are also acquiring equity, something that does not occur when you use credit cards to acquire disposable assets.
Pay off your car account first since it has the highest non-mortgage interest rate. Once that is done, do not consider those now non-existing car payment money as free money. Instead, use it as an increased amount to pay of the credit card debt. Once your revolving debt is paid, apply the extra cash to mortgage principal payments.
That’s pretty much what I was going to say. Paying off your mortgage and car loans won’t reduce your monthy cash outflows, while paying off your entire credit card each month will.
Assuming you meant a 15 year mortgage at 8.375% in the OP - have you looked into refinancing that? A quick search indicates rates are in the 5-6% range for 15 year term in Texas. I have no idea what your credit is like, but you should be able to get some firm refi numbers from local banks.
I find it hard to believe that your credit card rates won’t be going up at some point. I know there are lots of teaser rates for new cards, but I think they all go up after a few months to a year. I’d carefully double check this.
You generally want to pay off the debt with the highest effective interest rate (remember that tax benefits for mortgage payments mean that the effective rate is lower), but if one debt’s rate is going to increase, it may make sense to start paying it off even before the rate increases.
I’m assuming by “15% mortgage loan (8.375%)” you mean a loan with an interest rate of 8.375% for an amount that equaled 15% of the purchase price of your house (in a situation where you had a 5% downpayment, and two different loans, for 80% and 15% of the purchase price, or something similar). If you’re deducting mortgage interest from your income taxes, then the effective rate is probably lower than the car loan.
many loans have a “penalty” for advance payment that can kill the benefit you get from making the advance payment. CCs don’t.
is your mortgage deductible? CCs aren’t; car payments usually aren’t either (in some locations they are if you can count the car as a business expense).
Also, keep in mind that if you do a balance transfer of your Credit Cards, the teaser rate may be excellent (0%, 4.99% or whatever) but there is almost always a fee involved, like 3% of the transfer that can make it actually a fairly expensive proposition.
Good to look out for this, but IME, the fee is insignificant compared to the savings in interest. It probably wouldn’t be worth transferring from an account at 5% to one at 4% interest, but I only transfer when the difference is significant, and the fees are usually paid off in interest savings within a few months.
The loans are pretty close in terms of interest, and mortgage is tax deductible. My suggestion is:
1 - Get your house in order, don’t spend more then you take in, set a budget.
2 - Pay down the lowest balance to get rid that loan, use the extra money to pay down the next.
3 - Rinse and repeat till you only have the mortgage.
4 - if the mortgage is adjustable however you may need to change things.
Did you do a comparison between the two? Which one would save you the most money overall? (No, no. Not what your lender told you but what you calculated on your own.)