30 Sep Should I Pay Off My Credit Card Debt or My Mortgage?
- Credit card debt features low monthly payments, but double-digit interest which compounds daily, causing balances to grow fast and making it hard to eliminate the debt.
- Mortgage payments offer low-interest rates, but higher monthly payments on larger balances over a long period of time.
- Paying off credit cards will save you money on daily compounding interest payments.
- Paying off your mortgage will eliminate your biggest monthly bill, freeing up large sums of cash each month to accelerate retirement savings or building a strong emergency fund quickly.
When you have high levels of debt is can be overwhelming to decide where to start your debt relief journey. The bills stack up, and each month you barely have enough to survive. You wonder if you will ever be debt free and struggle to see how you will ever save for your future?
Looking at your budget, you wonder whether it’s better off to pay off your high-interest credit cards or to get rid of your highest monthly payment; your mortgage.
Before deciding which road will best meet your financial needs, consider these factors:
The Key Features of Credit Cards
Credit card companies only require minimum monthly payments ranging from 1 to 3% of the existing balance. The result is low payments in relation to the balance. For instance, you could carry a $10,000 credit card balance and only pay $200 a month.
The challenge with low monthly payments in conjunction with high-interest rates that compound daily is that very little goes toward the principal balance in each monthly payment you make. It could take over 30 years to get rid of the debt, paying only the minimum payment each month.
Features of Mortgages
Mortgages could last anywhere from 10 to 40 years, with the 30-year mortgage the most common choice among borrowers. Banks offer both fixed and variable rate mortgages, with rates running between 3 and 4% in today’s economic environment.
Mortgages provide low-interest rates for a finite period of time, and steady monthly payments, giving you payment certainty for budgeting purposes.
The downside is that typically, your mortgage payment is your biggest monthly bill, and getting behind could put your home at risk. Paying a credit card late could result in collection calls but will not cause you to lose your home if you default. Falling behind schedule on your mortgage payments could result in you losing your home to foreclosure.
Paying Credit Card Debt in Retirement
Credit card companies charge an average interest rate of 17.89%. Double-digit interest, compounded daily, makes it difficult to eliminate this type of debt and costs the most over time to maintain. When thinking about retirement, it may seem easier to make a $200 monthly credit card payment than a $2,000 mortgage payment. However, the interest and daily compounding schedule will impact the amount you must pay to get rid of the debt over the long haul. If you continue to make only the monthly payment on your credit card debt, you may see your balances increase each month, even if you don’t make additional purchases. For this reason, carrying large balances on high interest credit cards can be financially devastating to your ability to save and grow your money with compounding interest.
Paying a Mortgage in Retirement
The money you will need to live comfortably in retirement depends largely on your monthly expenses. Lowering the amount of money you need each month has the single most significant impact on your long-term financial needs. When you can live on less, you can enjoy a quality retirement, even if you have a lower level of savings.
In many households, the mortgage payment accounts for 30% or more of monthly expenses. Eliminating this bill makes up for shortfalls in investments and reduces the amount of cash you need to live comfortably in retirement.
The Best Course of Action
Cash flow is the key to financial success. You must earn more than you spend and have enough left over to save for future needs. Freeing up cash flow will give you more funds to invest in other financial priorities.
Servicing debt is the enemy of cash flow because it redirects money from today’s earning to yesterday’s expenses.
In most cases, getting rid of credit card debt is the highest priority because of the high interest that accompanies the debt. After you eliminate credit card debt, you will have the means to accelerate your mortgage payoff and increase retirement savings. Today’s historically low mortgage rates further lower the cost of maintaining a home and tip the scales in favor of prioritizing credit card debt elimination over retiring mortgage debt.
Frequently Asked Questions
What order should I pay off debts?
Starting with the highest interest debt first will save the most money. However, some consumers find more motivation by paying off the lowest balance first for a quick win.
Is it better to pay high-interest debt first or the mortgage first?
Mortgages tend to have high payments and high balances, but low rates of interest. Credit cards, on the other hand, come with high interest, which compounds daily, and high fees. Paying one day late can result in an average late fee of $36. Paying credit cards off first will save you the most money over the long term.
Should I keep a balance on my credit card or pay it off?
Using a credit card to make purchases does not always mean you carry debt. Paying the balance in full each month will avoid all interest charges. When your balance carries over from month to month on a credit card, the interest begins accruing from the date of purchase and compounds on a daily basis.
About Titan Consulting Group
Titan Consulting Group helps consumers evaluate various debt relief options and choose the right program that best fits their short-term and long-term financial goals. We work with consumers seeking debt consolidation loans, or who may be considering options like debt negotiation or bankruptcy. Through our network of partners, we can help you find the right solution to reach your goals and get back to living a life free from high interest credit card debt.
Contact us today at (888) 488-4517 or Apply Online now.