Revolving debt, such as credit cards and lines of credit, usually have higher interest rates than larger, secured debts such as mortgages. To keep your credit score high and overall interest rates low, pay down revolving debt first.
Significance
If a borrower has to choose which debt to pay down first, he should eliminate his revolving debt and then begin to make extra payments on his mortgage, once revolving debt is paid in full. If credit card balances are less than 30 percent of the credit limit, the impact on the credit score is minimal.
Function
Revolving debt is meant to be short term, while mortgage debt is meant to be long term. By eliminating revolving debt first, the borrower can apply extra income to the mortgage debt to pay it down sooner.
Types
Revolving debt can come in many forms, such as credit cards and lines of credit. It can be secured or unsecured. A mortgage can have a fixed or variable rate and can have a term of 10 to 40 years.
Considerations
Revolving debt can increase quickly yet is paid down slowly when only paying the minimum payment. To decrease the chances of this happening, a borrower should pay off the balance in full each month on all credit card debt, if at all possible.
Misconceptions
Paying down a mortgage will not help a borrower's credit score until the amount owed is quite small compared to the original loan amount. However, for every extra payment made per year on a 30-year mortgage, the borrower knocks 7 years off of the life of the loan, saving thousands in interest.
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