MONEY CLINIC | What debts should I pay first to improve my credit score?
Consumers have turned down their credit cards and have been reluctant to take on new unsecured debt, according to Nedbank. Photo: Getty Images
A Fin24 user would like to know whether the disbursement of a car loan or a credit card makes her creditworthiness “look better”.
Which debts should I pay first? What Makes My Credit Look Better? Car loan or credit card?
Tessa Verwoerdt, Head of the Money Solutions Department at Bayport Financial Services, answers:
Car loan or credit card?
The two products are designed for different purposes, with vehicle finance being a secured loan for buying a vehicle on credit and credit card being a revolving loan that gives you easy access to cash when you need it. You can’t compare the two products right away. The customer should rather get the designed product, in this case the vehicle financing.
What Makes My Credit Look Better?
When it comes to improving your credit score, the main consideration is servicing your debt on time, regardless of the product. Because of this, your creditworthiness should be affected in the same way if the risks / amounts are the same.
Which debts should be settled first?
The answer to this question is a combination of many factors, including the total cost of borrowing (made up of the interest rate, management fees, enrollment fees, and / or credit life insurance, which vary by product) and commitment / amount. When the total cost of the loan and the amount are the same, there is no preferred choice between the two. If there are differences, first of all, stay away from the debts with the highest borrowing costs.
Because interest rates are calculated on the outstanding balance, the higher exposure results in a higher absolute amount (the total calculated interest rate) paid on the interest rates when the interest rates of the two products are the same but the risks are different. It makes most sense to identify the product with the higher absolute interest amount and pay it out first. However, there are different scenarios to answer this question and it depends on your personal circumstances.
Questions can be edited for brevity and clarity.