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Should I Use My Bonus to Pay Down My Credit Card or Car Loan?

Question: I have $17,000 in credit card debt at a variable rate of 10.99%, which I plan to pay off using my monthly income by December 30. I have a $15,000 car loan at 2.65% fixed with 4.5 years left to pay on it, which I was not planning to pay off prior to the loan term date. I am receiving a $7,000 after-tax bonus in September. Should I use this to pay down the car loan or use it to pay down the credit card?

Answer: Congratulations. You now have an extra option to deal with your financial woes. And in your case, $7,000 will come in handy.

With such a high rate on your credit card, this debt is the more dangerous of the two. It’s also sucking up a lot of your income. To pay off $17,000 by December at 10.99%, you’d need to pay $3,494 each month. Use your bonus to cut that debt, and you’ll slash the balance to $10,000, and cut your monthly payments by about $1,440 – money that you can then put to work elsewhere, like paying down your car loan or cushioning your savings account for a rainy day. (If you don’t have an emergency fund yet, you might divert some of your bonus there first to protect against further debt, says Sheryl Garrett, a fee-only certified financial planner.)

As for your car loan, what you have here is a fairly good deal. The average rate on common car loans right now is around 5.5% and rising, according to That, plus the fact that you have a fixed rate, makes your car loan among the cheapest. And that also makes paying it down quickly less pressing.

Looking forward, a few hypothetical scenarios also suggest that paying the credit card with this bonus is the way to go. In case you run into hard times, you’ll have a larger credit line to pay for the essentials. You won’t be able to lean on a car loan for that. And, given the U.S.’s downgrade last week, analysts say that credit card interest rates could soon rise, even on existing balances. That’s a scenario you’d want to avoid, and this bonus will do that for you.

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Comments (5 of 6)

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    • 1

    • -1′

    • I chose to pay down the credit cards, thinking that I would have the extra credit line there in case I needed it. What happened is that the banks collapsed my credit lines by the $5,000 I had paid off on each card. Sure, I saved on high interest rates on the cards, but was caught by surprise by the other.

    • Pay down the credit card, and then pay down the car loan and do not ever get a loan again. If we all agree not get a loan at interest, prices will come down so that we will be able to afford things cash down! This is because each of us won’t be paying for the lifestyle of a fat cat banker who creates money out of thin air and demands interest for it when we borrow:

    • Get a cheaper car and pay off the credit cards. Use some of the money to pay off the car if it is upside down.

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