Which Debt to Pay Off First: Credit Cards vs. Installment Loans

When you're paying down loans and credit card debt, focus on your credit card debt first — with one exception.
NerdWalletAug 5, 2021

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If you're paying down credit cards and installment loans, you may be wondering which to focus on first. Here's how you should think about paying off your credit card debt and your installment loans.

There are several good reasons for prioritizing your credit card debt over an installment loan like a car loan, mortgage or student loans:

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. That means lower  — and because utilization is one of the biggest factors in your score, that can translate to a higher FICO score or VantageScore.

Paying your installment loan on time reflects well on your credit report — but it doesn't have as large an impact as lowering credit utilization does.

Also, your credit score takes into consideration whether you have different types of credit open. Having some installment loans (in addition to revolving credit such as credit cards) and steadily paying them throughout the life of the loan will help .

In addition, if you look at your credit card statement and compare it against your mortgage or car loan bill, one number will jump out at you — the interest rate. In general, a credit card will have a much higher interest rate than an installment loan — in many cases at least 10% higher (but check to be sure). 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 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.

Lenders offer as a short-term fix for consumers when cash is tight. There’s no credit check involved, and you can usually be approved for a payday loan quickly. But this easy-to-get money comes with a heavy price, usually in the form of exorbitant fees and triple-digit interest rates.

Always prioritize getting rid of payday loans. Here’s why:

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