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I'd like to get some ideas on the following situation. I currently have $4k on a Credit Card at 4.9% APR until the balance is paid off. I also have $6k on a car loan at 6.25% APR. I am investing some money now, but also making payments on both loans in excess of the minimum monthly payments. From the APR standpoint, the 6.25% car loan is better to pay off first, as I save in interest. My question is, from a credit history or credit score standpoint, is having a car loan considered to be "better" than having a credit card debt? Which loan should I try to pay off first each month with my payments over the minimums? Just go with the numbers and pay the car loan, or go with my gut feeling as I "prefer" to have a car loan over CC debt? Any advice would be welcome.

Thanks,
NR.
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I currently have $4k on a Credit Card at 4.9% APR until the balance is paid off. I also have $6k on a car loan at 6.25% APR. I am investing some money now, but also making payments on both loans in excess of the minimum monthly payments. From the APR standpoint, the 6.25% car loan is better to pay off first, as I save in interest. My question is, from a credit history or credit score standpoint, is having a car loan considered to be "better" than having a credit card debt? Which loan should I try to pay off first each month with my payments over the minimums? Just go with the numbers and pay the car loan, or go with my gut feeling as I "prefer" to have a car loan over CC debt?

From a credit score standpoint it's pretty near impossible to quantify which is better, since so many interrelated factors are considered. From a judgemental perspective, a lender might view an open revolving credit line as a potential liability up to your credit limit, whether you're carrying a balance or not. An installment loan balance (ideally) only goes down, and a loan that will be paid off in the short term might even be excluded from debt ratio calculations on your ability to pay.

I'd say pay down the higher rate car loan. When it's paid off, you probably won't be tempted to go buy another car, but it's too easy to run a credit card balance back up after it's been paid down.
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I'd say pay down the higher rate car loan. When it's paid off, you probably won't be tempted to go buy another car, but it's too easy to run a credit card balance back up after it's been paid down.


I'd pay off the car loan first too. Not only is the interest rate higher, but the credit card debt is unsecured. Not that you'd want it to come to this, but if the worst happens and you can only meet the payments on one of the two loans, you won't be looking at a situation where they could take your car away.

That being said, I'm not really sure how it would affect your overall credit rating.

My thoughts only,
Cheeze
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Typically, I'd go with paying off the highest interest loan first. But consider this: the car loan is fixed at 6.25% for a finite amount of time. The credit card, while only 4.9% now, has no guarantee of staying there, does it? Even if it was a balance transfer, those low rates are usually for a limited amount of time. It could suddenly jump to 12% or more before you've paid it off.

As for which kind of debt "looks better", my gut feel is that the best kind of debt to have is:

1. Home Mortgage - because it's an investment in equity.
2. Student Loans - also a type of investment in your earnings potential
3. Auto Loan - a neccesity. Nearly everyone needs a car.

I tend to place CC debt at the bottom of the heap because it's more an indicator of indulging "wants" instead of "needs" if you are in the habit of carrying a balance. And like others have already said, the scoring agencies know the car will eventually be paid off, whereas the CC balance could easily grow bigger.

Now... are you confused yet?

Cheers, Jeanie :-)
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from a credit history or credit score standpoint, is having a car loan considered to be "better" than having a credit card debt?

Generally, yes. A car loan is an "installment loan", and having different kinds of loans can help the credit score. If it is the choice of one or the other, the car loan is probably better. However, generally an account will appear on the creit report up to 7 years after the date of last activity, so paying off a car loan does not necessarily mean you lose the benefit of that loan in determining your credit score until it ages off the credit report.

A credit card account, on the other hand, is a "revolving debt" that can be added to at any time. As one other reply indicated, car loans, student loans, mortgages are usually considered "less bad" than credit card debt.

Which loan should I try to pay off first each month with my payments over the minimums?

As long as I never miss a minimum payment due and my debt is not increasing (and preferably with my total debt decreasing), I would probably not worry so much about the credit rating unless marginal for qualifying for the best rates on a mortgage.

As per the numbers were presented, paying off the car loan is probably the least-expensive approach unless there is something "odd" about how interest is calculated on the car loan.

On the other hand, some credit card companies are very devious. If you charge something on that card, it will probably go on at a higher interest rate, but the payments beyond the interest will go to the lowest interest rate debt first. (This is one trick a credit card company has of turning a nice 4.9% balance transfer to a high interest income to the card issuer.) Another trick is to delay posting payments by a day and, if one is close to the due date when the check arrives at their designated payment location, they may use that to charge you a late fee and also increase the interest rate. (I have heard of cases where the payment was posted to the credit card account several days after the check was posted to the checking account--the credit card issuer backed down on late fees when the complainer said s/he had proof that the check had cleared before the due date.) The really bad companies "forget" to send a statement so the minimum due payment is missed. (Alas, you are responsible for payments, whether or not you receive the statements.) So, if you are distrustful of the credit card issuer, it may be better to just pay off the card so you can be at peace about it.

I guess that means it is your choice on what you pay down first.

My recommendation would be, once both are paid off, to start making "car payments" to a savings instrument (money market mutual fund, money market deposit account, or even a regular savings account) so you can earn interest on money to be used for buying the next car instead of paying interest after the next purchase.
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The easy answer would look to be to pay off the loan with the higher 
interest rate first, but maybe not.

If the auto loan is a "Rule of 78s" loan then it may be better for you 
to just continue to make regular payments to it, and make the extra 
payments on the credit card account(s).  The Rule of 78s is a way to 
structure a fixed-payment loan so that the lender gets the interest up 
faster (earlier) in the payment cycle than a simple interst loan.

If you hold the rule-of-78s loan to completion, you will have paid no more interest than a simple interest loan, but you will have paid that 
interest earlier in the loan.  So early in fact that it probably makes 
no sense to pay off a rule-of-78s loan early if it's been held for more 
than 30% or 40% of its term.

Check your payment schedule that came with the auto loan to see what 
type it is.
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