MONEY CLINIC | Which debt should I pay off first in order to improve my credit score?

accreditation
0:00
play article
Subscribers can listen to this article
Nedbank says cosumers have been pying off their credit cards and reluctant to to take on new unsecured debt.
Photo: Getty Images
Nedbank says cosumers have been pying off their credit cards and reluctant to to take on new unsecured debt. Photo: Getty Images

A Fin24 user wants to know whether paying off a car loan or credit card will make her credit score 'look better'.

She writes: 

Which debt should I pay off first? Which makes my credit score look better? Car loan, or credit card? 

Tessa Verwoerdt, Head of Department in Money Solutions at Bayport Financial Services responds:

Car loan, or credit card? 

The two products are created for different purposes, vehicle finance being a secured loan for buying a vehicle on credit, and credit card being a revolving loan meant to give you easy access to cash when you need it. You cannot compare the two products like for like. The client should rather get the designed product, which is vehicle finance, in this case.

Which makes my credit score look better? 

When it comes to improving your credit score, the key aspect is servicing your debt on time regardless of the product. Based on that fact, if the exposures/amounts are the same, your credit score should be affected the same way.

Which debt to pay off first? 

The answer to this question is a combination of many factors, including total cost of credit (comprising interest rate, admin fees, initiation fees and/or credit life insurance which differs depending on product) and exposure/amount. If the total cost of credit and the amount are the same, there wouldn’t be much of a preferential choice between the two. If there are differences, start by staying off the debt with the highest cost of credit.  

Since interest rates are charged on outstanding balance, if the interest of the two products are the same but the exposures are different, the higher exposure will attract to a higher absolute amount (the total interest rate charged) being paid towards interest rates. The most prudent thing to do would be to identify the product with the higher absolute interest amount and pay off that first. However, there are various scenarios to answer this question, and it depends on your personal circumstance. 

Questions may be edited for brevity and clarity.

  • Have a money problem that needs solving? Fin24 can help! Send your question to editor@fin24.com

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

Get the biggest business stories emailed to you every weekday.

Go to the Fin24 front page.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
Rand - Dollar
14.26
+0.1%
Rand - Pound
19.88
+0.1%
Rand - Euro
17.01
+0.2%
Rand - Aus dollar
10.75
+0.3%
Rand - Yen
0.13
+0.2%
Gold
1,780.45
+0.1%
Silver
25.90
+0.5%
Palladium
2,592.00
+1.3%
Platinum
1,094.14
+1.0%
Brent Crude
74.81
-0.1%
Top 40
59,494
0.0%
All Share
65,552
0.0%
Resource 10
61,934
0.0%
Industrial 25
87,234
0.0%
Financial 15
12,834
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Voting Booth
Should government have assigned a majority shareholding in SAA to the private sector?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes, It's a good decision
68% - 423 votes
Not a good move
9% - 54 votes
Too early to tell
23% - 145 votes
Vote