debt

Pay off mortgage or credit card early?

Steve BucciDear Debt Adviser,
I own a home, on which I owe $92,000, and have 24 years of mortgage payments left at around $580 per month. I rent it out at a rate which pays the mortgage, PMI and taxes ($800). I can pay it off in seven years by paying additional money. I don't ever plan on living in it again and plan on using it for retirement income by renting it. It's valued at $70,000. Should I pay it off or pay big into a $30,000 credit card/loan debt which is at 9 percent interest?
-- Rickey

Dear Rickey,
Rather than focusing on your interest rates, I suggest you look deeper into what the rates are attached to. Think about what could go wrong that would be hard to recover from if something unforeseen bites you. I recommend you use your extra income to pay off your credit card debt -- but not for the reason that you may be thinking (the 9 percent interest rate). Your mortgage debt is a big friendly dog that is sleeping in the corner, not bothering anyone and paying for itself with rent money. In comparison, your credit card debt is like a barking, junkyard dog waiting to maul you if you make the wrong move. Better to let the sleeping dog lie and deal with the dangerous dog.

Use Bankrate's credit card payoff calculator to determine how quickly you can pay down your $30,000 credit card debt and then commit the funds to do it. But the commitment doesn't end there. You also need to promise not to make the debt beast more dangerous -- meaning bigger -- while you are working to pay off the debt. I want you to work out a budget plan so you are not spending more than you earn and adding to your credit card balances. If you don't have one already, you need to also fund two emergency savings accounts with a portion of your extra income. One account will be for emergencies such as an illness or income interruption. The other account will be to cushion any real estate expenses or vacancies you will eventually face with your rental property. With adequate savings in place, you will have no reason to use credit except for convenience.

Financial success is not necessarily who has the most money. It is who uses the money they have the wisest. Eliminating a nonessential monthly payment from your regular obligations is a smart financial move. Should you experience a disruption of income, you will be carrying less of a burden and be more nimble in handling what life may throw at you with your savings.

Once you pay off your credit card debt, you might consider visiting with a financial planner to determine your next moves for your discretionary income. Your planner will help you establish short-, mid- and long-term goals and then determine what will be needed to meet them.

To keep the barking dog in his doghouse and out of your life for good, use your credit cards for purchases that you can pay off each month or, at the very longest, in 90 days or less.

Good luck!

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Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

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