Home > Managing Debt > I Just Got $7,500! What Do I Pay Off First?

Comments 0 Comments

An unexpected windfall is probably one of the best things that can happen to someone in debt. At the same time, it can be difficult to decide where to apply those funds. Should you be so lucky to have this problem, there are a lot of things to consider, like the interest rates on your debts, the debts that hurt your credit most and what choices would make you happiest.

A Reddit user found himself on the receiving end of an unexpected $7,500, and he took to the Internet for advice on how to use it. He gave the following breakdown of his debt:

  • $400 on a credit card with an interest rate of 20.99%
  • $6,888 personal loan at 10.5% ($244 per month)
  • $14,300 auto loan at 1.9% ($375 per month)
  • $100 in parking tickets
  • $684 collections account
  • $640 collections account
  • $275 medical bill
  • $148 medical bill

His plan, he wrote, is to put $500 toward his emergency fund and pay off the $400 credit card debt. He really wants to get rid of the $6,888 loan, but he asked for some advice from the Reddit personal finance community.

There are a lot of ways the Redditor can approach this decision. To make the process easier, he can look at the pros and cons of his potential choices. I won’t go over all of them, because dividing the money among different debts presents a lot of possibilities, but there are several choices likely to leave this guy satisfied with the way he used his money.

Emergency Fund

Building savings is a great idea, and unexpected money presents the perfect opportunity to bolster an otherwise thin rainy-day fund. You don’t need to win the lottery for this — a tax refund, work bonus or gift money could be a perfect foundation or addition to this crucial savings account.

Gerri Detweiler, Credit.com’s director of consumer education, had a few suggestions for the post writer:

“Yes, build up emergency savings,” she wrote in an email. “If the total you get after taxes is less than you think, you might make the emergency savings slightly smaller.”

Medical Bills

These debts probably don’t carry interest, so they may not be your highest priority, but medical bills are notoriously messy.

“We’ve heard from many people who have been suddenly turned over to collections for medical bills on which they are making payments,” Detweiler wrote. “They are small and it’s probably better to get them off your plate. ”

Sometimes, small things are credit killers (if you want some examples of these horror stories, give this a read), so think about the potential for more headaches before overlooking the small stuff.

Parking Tickets

While these aren’t often as problematic (or expensive) as medical bills, parking tickets can find their way to debt collectors, and you don’t want your credit score to suffer because of a measly parking ticket. On the other hand, chipping away at high-interest debt is more appealing than eliminating parking tickets.

The tickets are just one more thing you can cross of your list, so it’s probably time to pay up and move on.

Credit Cards

Speaking of high interest rates: It’s a good thing his credit card debt is a priority, because that $400 will grow fast. “The interest rate is ridiculous,” Detweiler wrote.

Paying off credit card debt has multiple advantages. First, you get to enjoy the relief of being out of credit card debt. Second, you will likely raise your credit score in the process. One of the biggest factors in determining your credit score is how much of your credit limit you use (you can see your credit utilization rate for free with a Credit.com account), so lowering or eliminating your balance will improve that ratio.


Contrary to popular belief, paying off collections accounts does not improve your credit score (unless the model is VantageScore 3.0, which excludes paid collections accounts). For that reason, paying off these accounts may not be a high priority when deciding what to do with an extra $7,500, but Detweiler suggested he try to settle the collections accounts.

“Depending on how old they are, you may be able to settle them for less than the full balance — shoot for 50% and see what happens,” she said. Taking care of those means the debts won’t be sold to other collections agencies and add another collection account to your credit report. (Note: You should check the statute of limitations on the debt, because if it’s too old, you shouldn’t have to pay. Here’s how to figure that out.)

The Loan

Based on the writer’s post, it sounds like that $6,888 loan is really grating on him. Considering his other goals, and the fact that he may have to pay taxes on the $7,500, it may not be realistic to try and eliminate this one right now.

That doesn’t mean he can’t make progress. Throwing a chunk of money at the debt will at least reduce the total balance, making it easier to tackle in the future.

After the writer posted his original message, he received a slew of advice from the community, and he posted an update saying he used $100 of his emergency fund to knock out the parking tickets and plans to focus on that pesky loan. He ended the post saying the decision “Feels great,” and sometimes, that’s the most important part of the decision.

More on Managing Debt:

Image: Creatas

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team