Ask Wellthi: What to pay off first: tax debt or (Credit Card)CC debt?

Ask Wellthi here, your AI-powered stand-up finance assistant, equipped to provide you with answers to all your money questions, with flair! Today, we’ll address the query posed by the Reddit user Ok_Birthday7136 regarding prioritizing between tax debt and credit card (CC) debt. Let’s delve into the details:

My yearly salary is around 63k. I am currently carrying around 20k in CC debt from years ago when i got in a tough situation. I’ve been slowing paying this down. If I continue paying the additional amount I put towards my payments every month, i’ll be free from all CC debt by early 2026. knowing when it will end makes it easier to deal with, mentally. the minimum payments of all cards monthly total at $770.

I’m also in a bit of state tax debt from the same tough situation that currently totals around $7100. I ended up in a situation where my wages are garnished to pay this down- 10% of my gross pay goes towards this debt weekly. That’s $122 per paycheck. another thing i’ve adjusted to but boy would i like to have that money in my check. This will be paid off in a little over a year from now with the amount that goes into it.

I have a line of credit I can use to pay this tax debt right away, but I’m unsure if that makes any sense. it would reduce that strain from my paycheck and probably make it easier for me to put more towards paying the CC debt down, which all have MUCH higher interest rates than the tax debt and the line of credit.

Ask Wellthi says:

Hey there, Ok_Birthday7136! It sounds like you’re dealing with a challenging financial situation, but you’re on the right track by actively working towards paying off your debts. Now, let’s address your question regarding whether to pay off your tax debt or credit card (CC) debt first.

Given the information you’ve provided, it’s important to evaluate your options and consider the interest rates associated with each debt. You mentioned that the credit card debt carries much higher interest rates compared to the tax debt and the line of credit. Typically, it’s advisable to tackle high-interest debts first, as they tend to accrue more interest over time and can become more burdensome.

However, it’s crucial to assess the terms and conditions of your line of credit, such as its interest rate and any potential fees associated with using it to pay off the tax debt. If the interest rate on the line of credit is lower than the interest rate on your credit card debt, it might be worth considering using the line of credit to pay off the tax debt. This could help reduce the strain on your paycheck, giving you more financial flexibility to allocate towards paying down your credit card debt faster.

To make an informed decision, I would suggest doing the following:

  1. Review the interest rates: Compare the interest rates on your credit card debt, tax debt, and the line of credit. This will help you understand the cost implications of each debt.
  2. Consider the fees: Look into any fees associated with using the line of credit to pay off your tax debt. Factor in these fees when assessing the overall cost-effectiveness of this option.
  3. Assess your budget: Evaluate your monthly budget and determine how much you can comfortably allocate towards debt repayment. This will help you determine how aggressively you can tackle both debts.
  4. Seek professional advice: If you’re unsure about the best course of action, consider consulting with a financial advisor or a tax professional. They can provide personalized guidance based on your specific situation.

Remember, the most important thing is to create a solid plan and stick to it. It’s great that you have been making progress on your credit card debt by paying additional amounts each month. Stay committed to this approach and explore strategies to reduce your overall debt burden. With persistence and careful planning, you’ll be able to overcome this financial challenge.