Expert: David McArthur - 11/12/2008

Question
I am about to receive $15,000.00 tax free. I owe $27,000.00 in credit card debt and $16,000.00 for a vehicle. I plan to put the $15,000.00 toward the vehicle debt. Once it is paid off, I will put the $500.00 monthly payment toward the credit card debt. Is this the smartest way to proceed?

Answer
Audra,


That's a nice chunk of change.

There are two different ways to look at this.  Your idea of paying off the vehicle debt could work out well provided you stick to the plan of action you've outlined for yourself.

If you decide to proceed with that plan look at paying off the lowest balance first.It will give you both a sense of accomplishment and extra cash. Of course you will continue making timely minimum payments to your other cards for your credit's sake. Then continue paying off the other cards in the same manner.  

This is a "big picture idea" and will require you to change to a cash mindset.  Since the goal is paying off the debt, you wouldn't want to continue using your cards during this process. It also commits you to a vehicle for the next few years while you work on your other debt. So if you are sure you will not be replacing this vehicle during this process,  I'd say shoot for the stars.

Looking from the vantage point of your credit score, high usage on revolving debt could be hurting you. Thirty percent of your credit score is affected by your balances owed. That is large enough to consider. By applying the 15K to revolving unsecured debt you can bolster that portion of your scores. A blending of the two ideas could work for you.  Once you have 15K of debt gone that frees up monies to pay down the remaining balance.

My thought is to do a calculation on either scenario. Many larger banks offer a free consolidation planners under their websites.  They are designed to steer you toward debt consolidation with a loan or line of credit. Yet they are useful since you can input your own specific information (like interest rates) and find out the true cost of your acceleration plan.

Sorry so long but there's a lot to consider.  I specialize in helping people raise their credit scores.  Please check out my website at www.financialscoringsolutions.com