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Credit Card Debt vs. Mortgage Debt

It is always a good idea to pay off debt when you have some extra cash on hand. However, when it comes to the different type of debt you can pay off, it is hard to know which debt the best is to pay off.

 

Your credit card has a maximum amount you can borrow and the monthly payments for a credit card are based on how much you currently owe. Your mortgage is something with the same payment amount and a fixed pay off target date and you don’t add to the loan balance. The better debt to pay really depends on your situation.

 

Choose the Most Advantageous Path

On a financial level, it is best to focus your extra payments on paying off debt with the highest interest rate. This will be the credit card in most cases. Mortgage rates are typically lower than most type of debt. By paying off the debt with the highest interest rate you will be reducing the amount of money you are currently paying on interest.

 

Look to the Future

Your priorities might shift, especially if you have specific goals that you want to reach in the future. Let’s say you plan to retire in 2 years and you have 4 years left on your mortgage repayment schedule. In this case it would make sense to put that money towards extra payments on your mortgage, so you have lower expenses when you retire.

 

Boost your credit score

When you are looking to increase your credit score, you should focus on paying down your credit card debt first. Making extra payments on your mortgage has a very small effect on your credit score, whereas reducing balances on your credit cards can significantly increase your credit score. The difference is because unsecured credit card accounts are viewed as riskier than mortgages, so carrying high balances on these high-risk accounts suggests that you are in financial trouble. If possible, pay down each credit card's balance to less than 30% of the card's credit limit.

 

Making Your Decision

In most cases it will be beneficial to make an extra payment on your credit card debt rather than an extra payment on your mortgage. This is since credit cards carry higher interest rates and carrying a higher balance has a more significant impact on your credit score. However, if you plan on retiring soon it would make sense to put an extra payment towards your mortgage. Just remember that your decision is based on your individual needs.

 

NU-VISTA Premiere Realty Inc. Brokerage.

805 Adelaide St N
London, ON N5Y 2L8
Phone: (519) 438-5478
Email nuvistarealty@rogers.com

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