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Pay auto loan or credit card with windfall?

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Jeanine SkowronskiDear Credit Card Adviser,
I have $6,000 and want to help my credit score. Should I pay off a $6,000 secured car loan, or should I pay off 3 credit cards totaling $6,000?
-- Nancy

Young woman with laptop on hardwood floor © iStock

Dear Nancy,
The answer truly depends on your overall financial health.

There's no collateral backing your unsecured credit card debt. However, "you could lose your car if you don't make the payment, so if it's a matter of prioritizing because you can't afford both, pay the car loan first," says Kelley Long, a Chicago-based CFP professional with Financial Finesse.

Now, if you're simply trying to consolidate and pay off your debts sooner or you're looking, as you mentioned, to improve your credit score, it's best to pay down whichever debt carries the highest interest rate first.

Doing so will save you money in the short term and long term and, in turn, decrease the likelihood that you'll commit a major credit score faux pas down the line, like missing a payment.

Now, there's a good chance that 1, if not all, of your credit cards carries a higher annual percentage rate than your auto loan. The average interest rate on a variable-rate credit card, for instance, is about 15.7%, while the average interest rate on a new car hovers around 4.3%.

Plus, high credit card balances do big damage to your credit utilization rate, essentially how much debt you are carrying compared with how much credit has been extended to you.

Experts generally recommend keeping this rate, collectively and on individual cards, below 30% for the best credit-scoring results. (The lower the utilization rate, the better.)

As such, paying down credit card balances is considered 1 of the quicker ways to improve your score, so put your windfall toward those debts. Be sure to continue making all of your auto loan payments as agreed.

Other tips for boosting your credit include limiting inquiries, making all payments on time and reviewing your credit report for mistakes. You can pull yours for free at myBankrate.

Good luck!

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