I am an outside sales rep. and because of the economy, my income has taken a hit over the past 3 years. Things are starting to turn around, but I have accumulated some credit card dept trying to survive the storm. I have a car that is paid off, and I was thinking about selling this car to pay off my credit cards. This means I would have to buy another car. I could either pay off a car in the next 5 years or pay off the credit cards in the next 4-5 years. What should I do? In the next 2-3 years I’m am hoping to be in a position to buy a new house. How do the banks view credit card debt vs. a car loan?

ANSWER

Expert Thomas Graham iii's Answer:

A lender will look at credit card debt as "worse" than car loan debt. The reason for this is that credit card debt is unsecured while your car loan is obviously secured by your vehicle. At any time your car could be sold off to pay off/pay down the loan whereas there is nothing securing the credit card debt.

Therefore, I believe that if you have to have debt one way or the other, it would be in your better interest to have a car loan as opposed to credit card debt. I'm not exactly sure of the credit score impact of the two types of debt. I would assume that your credit score would factor in that the credit card debt would be unsecured and a car note would be secured similar to how a lendor would.

Thomas Graham iii, CPA, CFE

Oklahoma

7 yrs experience

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