Financial Advice Q&A

Visitor
Willy1156
Posts: 2
Question
Should I have paid my debt differently?
[ Edited ]

Good Evening! I recently purchased a vehicle and have an excellent rate of 3.99% on 14319.00. I recently made a $4000.00 payment on the car note, but I have two credit cards near their max of $4k each, should I have paid off one of the credit cards, or should I have thrown all of the $4k at the car note?

Other Answers: 1
Community Manager
ScottHalliwell
Posts: 886

I'm all about paying down debt, but I'd have probably taken a different approach. The good news is, your total debt load is now smaller.  The bad news is, had you taken a different approach, you probably could have saved yourself some interest expense over time and done better for your credit score.  Here’s what I mean.

 

Interest Saving
Generally speaking, if you have extra money available to knock down some of your debt, you should apply that money to your highest interest rate debt first.  This should allow you to pay less interest over time. Having said that, some people will choose to pay off smaller balances first to give themselves a sense of accomplishment. I’m ok with that if it’s necessary to keep one’s motivation up…but it’s not the way to get the biggest bang for your extra bucks.

 

Credit Helping
Next, you’ve got the issue of your credit score.  Having maxed out credit cards reported on your credit report is typically bad for your score, so you should avoid that if you can.  As for how small to keep the outstanding balance as a percentage of the available credit, opinions differ.  I’ve seen suggestions of no more than 15% and I’ve also seen no more than 25%. The credit bureaus won’t tell us the exact figure but they do make it clear that smaller credit utilization rates are better. Personally, I prefer 0%.

 

Don’t Forget the Cash Cushion
Finally, should you find yourself with extra cash again in the future, don’t forget to keep some set aside for emergencies and unforeseen expenses.  That way, when something unexpected comes up, you’ll have money in the bank to pay for it instead of reverting to credit cards again. Generally you should shoot for a balance of 3-6 months’ worth of your committed expenses but if you’re trying to pay off consumer debt as you build it, starting smaller can be a good move.

 

Thanks so much for your question.  I hope this helps and I wish you all the best!

 

Scott

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