It’s better to pay off a credit card first, before a car loan, in almost all cases. Credit cards tend to have far higher APRs than car loans. The average APR for all cards in circulation is around 15%, and the average for new offers is around 19%. With car loans, the average APR is around 3% - 6%, depending on what type of lender finances the loan and whether the car is new or used.
It’s best to pay off debt with the highest APR first because the higher the APR is, the faster interest builds up. That’s especially true with credit cards, whose interest compounds daily. With car loans, you generally pay interest only on the principal and not previous interest charges, too. However, a car loan may not be cheaper than a credit card 100% of the time. So focus on paying off whichever debt is the costliest first.
Whichever balance you decide to focus on paying off first, your credit card or your car loan, make sure to continue making at least the minimum required payment on the other each month, too. Otherwise, you could owe late fees and suffer credit score damage. And if you miss payments on your car loan, you could potentially lose your car.
There is another option, though. You could pay off both your credit card and your car loan at the same time by taking out a new personal loan to consolidate what you owe. But that’s only worthwhile if you can get a personal loan APR that’s lower than your credit card and car loan APRs. Beating your credit card’s rate should be easy enough, but car loan APRs are already pretty low. Plus, you’ll need to be able to take out a loan that’s at least the size of your existing debts put together.
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