Reader Q: I have come in to some money – should I pay off my mortgage or credit card debt first?

3 min Read Published: 20 Mar 2012

Get an answer to your financial question online Reader Question:

If I came into a lump sum is it better to pay off my mortgage ASAP or pay the credit cards first. Mortgage is 4.9% 120 months left. My credit cards have various amounts (approx £5k in total) some nil % others 17%?

Thanks

 

My response

Interesting question.

You do not mention how big your mortgage is? The size of any lump sum and your overall debt are crucial factors in deciding what to do.

The first thing you should do is consider your wider circumstances. So I can only talk generally about clearing debt.

Clearing debt

It usually pays to clear debt systematically starting with the most expensive debt first and working your way down (possibly over time) to the debt with the lowest interest rate. By doing so, less of your monthly repayments go towards clearing interest. Instead, over time more and more of your repayments go towards reducing the actual amount borrowed. I cover this in detail in my article How to become debt free.

But there are a number of things you should check and bear in mind:

  • are there penalties for overpaying your mortgage? (some lenders do charge!)
  • Have you got an emergency fund? Should you overpay your mortgage, in most instances you may not be able to borrow back the money should you need to in the future
  • Can you remortgage to get an even cheaper mortgage rate?
  • Can you cut your expensive credit card rates (i.e. 0% balance transfers)?
  • How long do your 0% credit card rates last? If this is long term you may want to pay down your more expensive mortgage
So you see, should you come into some money. Firstly assess what you are up against (the above statements should help) and then draw up an action plan.

I hope that helps. Good luck

 

Damien

 

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