What should I pay off first: my mortgage or my credit card debt?
I owe about $22,000 on my house and $18,000 on credit cards. I am paying more than minimum payments on both. Now I am on disability and my income was cut by 60%. I think that I should pay off my house first so I have a place to live if my income changes again. At that point, I would pay the minimum on my credit cards. I have a credit score around 750. My plan is to move the balances around to keep the interest rates low. When the house is paid off in full, I would also have my credit cards paid off. What do you advise?
Focus on paying off the credit cards first. This type of consumer debt is considered "bad debt". A mortgage would be considered "good debt". The two main differences would be that you can deduct mortgage interest from tax liabilities and they are typically a fraction of the rate on credit cards. With that said, you should consider converting your credit card debt to a HELOC (home equity line of credit) and then chopping up all of your cards except one.
Best of Luck!
I can understand why you may feel that paying off your mortgage maybe a better option as it gives you the security of owning the house. However, if you think about it from an overall benefit perspective then paying off the debt with the higher interest rate is the better choice. Usually credit card balances have higher interest rates- and while you can move it around to take advantage of teaser rates- there is the risk that at some point you may not be able to find one and a higher rate kicks in. Also, keep in mind opening and closing many credit accounts can hurt your credit score. So will having a large credit balance as a percentage if your credit limit.
All the best and kudos for thinking about all these things!
Hi, to answer, I am going to make an assumption that the interest rates on your crredit cards is higher than the interest rate on your mortgage. If that is not the case, then my advice would change. Assuming that is the case, you should continue making the minimum payment for your mortgage. Arrange your debts based on interest rate; for example if you have 2 credit cards; one at 20% interest and one at 15%, and your mortgage is at 5%. Pay the minimum mortgage and minimum amount on the 15% credit card. Then allocate the amount over the minimums you had been paying and direct that towards the 20% credit card until you have reduced the balance to zero. Then, take the amount you had been paying towards the 20% credit card and allocate that to the 15% credit card (while still paying the monthly mortgage amount). Once the 15% credit card is paid off, you then put all the money towards the motgage. this allows you to manage the debt while limiting the toal amount of interest paid.
Assuming that your present income and situation does not change most financial professionals would advise you to rid yourself of credit card debt.
Also, the follow up suggestion would be, not to create any more credit card obligations.
Pay-off the debt with the highest interest rates first. This is likely the credit cards.