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Should I pay down my credit card or my mortgage?


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If I have an EXTRA $500 this month, is it better to pay down my 18% credit card with the $10K balance or my 6% mortgage with the $400K balance?


You should pay down the credit card first, for these 4 reasons:

1) Liquidity - once you paid the $ towards the mortgage, it's "gone". It's not revolving debt.
On the credit card, you can always charge it again, even get a cash advance, if you need the $500 back.

2) Credit score benefits from a low utilization of revolving credit. 'Mortgage utilization' is supposedly a factor too, but not nearly as important as revolving debt

3) Interest rate. The mortgage is at 6%, after taxes it's maybe at 4.5%
Credit card debt is usually not tax-deductible at 18% - there are exceptions if the money was used for investment purposes.
If you don't care about 1) and 2), this would be the most obvious reason.

4) Cash flow
Neither one of the loans will disappear but the mortgage payment will remain exactly the same (assuming it's a fixed mortgage). The CC's minimum payment will go down slightly as you pay down. So your cash flow improves a bit.

I would not pay down a mortgage aggressively if it is a 6%. We have November 2007 now. I think inflation will kick in in the next couple of years, and interest rates on mortgages will be near 10% by 2012. You may earn 10% on a CD account then also.
Of course, someone paying 18% on a $10k credit-card probably has no money for a CD account. Just trying to make an argument to keep the mortgage as long as possible.

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