Buying a house soon: is it better to pay down my credit card partially, or pay off a small personal loan?

April 3, 2009 11:24 AM

Buying a house soon: is it better to pay down my credit card partially, or pay off a small personal loan?

I'm buying a house in the U.S. and will be looking to get pre-approved for a mortgage soon. My credit score is currently in the 700s, and I make appx. $65,000 per year. I'd like to get pre-approved for a mortgage in the $130k-$150k range. I have about $8,000 in credit card debt (with $18,000 available) and a small personal loan (not a car) of $4,500. Before I buy the house, I'll have that $4,500 personal loan completely paid off -- unless it would make sense to knock $4,500 off of my credit card balance. Or does it matter?

posted by anonymous to work & money (5 answers total)

I always vote for getting rid of whatever has the highest interest rate first...
posted by iamabot at 11:36 AM on April 3, 2009 [2 favorites]

I'm with iamabot...it is hard to answer without knowing the terms of these two obligations.
posted by mmascolino at 11:43 AM on April 3, 2009

I'm not sure how much it will matter. I just bought a house while having ~10k in credit card debt, a similar salary, a car loan, 700s credit score, and it didn't seem to be an issue. The lender seemed to be much more interested in the amount of downpayment I had - they wanted to be sure I had a considerable investment in the house so it'd be harder to get upside down on it.

After that, they seemed to care the most about establishing that I had a stable income and that I paid my debts on time. Honestly, you may want to touch base with a few lenders to ask what they think - don't go for full pre-approval or anything, just see what they recommend. Consider it a vetting exercise as the quality of lender you work with during your purchase makes a big difference to your sanity.
posted by robocop is bleeding at 11:51 AM on April 3, 2009 [1 favorite]

Do you mean will it make it more likely to get the loan pre-approved, or is it a better financial decision?

Regarding the former, if the monthly payment on the personal loan is, say, $200, and the monthly payment on the credit card is ridiculously low, say, $30, it might make you *look* better to pay off the personal loan first, because that makes your theoretical monthly minimum payments look lower.

When I got my first mortgage, my credit report had several little department store cards reporting on it that I paid off monthly. The mortgage broker flagged them and told me to pay them off. Me: "But it's only $40 at Kohl's". Him: "Yes, but it's a $10 minimum payment each month, and we don't want anything to count against you". I was going to be approved for some amount anyway, but this did seem to make a difference in the amount I was approved for, according to their formula.

Note that this is different from what the amount might be that you *should* pay to pay the least interest. If the personal loan has a really low rate and the credit card has a super high one, it's in your obvious, uh, interest to pay off the credit card first.
posted by gimonca at 12:08 PM on April 3, 2009 [1 favorite]

You know, when I heard "personal loan" I thought the OP meant a loan between friends or family which has no real effect on credit scores. If that is the case, it would be fiscally prudent to pay off the credit card debt, but I would say the moral thing is to pay off the friend or family member even if it means not getting the very best home loan rate. The potential for problems/drama ("...he/she can afford a house but can't pay me back?") is high.
posted by agatha_magatha at 1:36 PM on April 3, 2009