Save some inheritance, then pay credit card debt

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class="topbanner"><span class="advertisement">advertisement</span><br/><iframe id="ctl00_top_ctl00_ctl00" width="1" height="90" border="0" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" allowtransparency="true" style="overflow: visible;"></iframe></div></div> <div class="pageHolder"> <div class="well"> <div class="storypage"> <div class="bgWhite pad20 padNoBottom"> <script type="text/javascript" language="javascript"></script> <div class="right fs9 arial"> <a class="mar8 marRight" onclick="PrintEmail1PrintPage();">Print</a><a class="mar8 marLeft" onclick="PrintEmail1EmailPage();">E-mail</a> </div> <div class="section-title mar15 marBottom">debt</div> <h1><span id="_SE_FLD" _se_fld="tcm:Content/custom:Content/custom:Headline">Inheritance: Save or pay off card debt?</span></h1> <div class="byline mar5 marTop">By <a href="https://web.archive.org/web/20100413171346/mailto:editors@bankrate.com">Steve Bucci</a> • Bankrate.com</div> <div class="clear"><span></span></div>  <p><span id="_SE_FLD" _se_fld="tcm:Content/custom:Content/custom:Page[1]/custom:Paragraph[1]/custom:Text"><p><img class="imgLeft" style="WIDTH: 66px; HEIGHT: 76px" height="76" alt="Steve Bucci" src="/web/20100413171346im_/http://www.bankrate.com/Images/steve-bucci.jpg" width="66" title="Steve Bucci"/><img class="imgLeft5" style="WIDTH: 30px; HEIGHT: 30px" height="30" alt="q_v2.gif" src="/web/20100413171346im_/http://www.bankrate.com/Images/q_v2.gif" width="30" title="q_v2.gif"/><span class="fcDarkBlue fB">Dear Debt Adviser,</span><br/> I have just received a $20,000 <a href="https://web.archive.org/web/20100413171346/http://www.bankrate.com/finance/mortgages/3-plans-for-40-000-inheritance.aspx">inheritance</a> from a relative that recently passed. As it turns out, my wife and I have about $20,000 in credit card debt with the monthly payments adding up to around $500. We also have a car loan with a 7.99 percent interest rate and a payment of $531 a month. The payoff amount on the car is $19,500. Which is better to pay off, the credit card debt or the car? <br/><em>-- Adam</em></p><p><span class="fcDarkBlue fB"><img class="imgLeft5" style="WIDTH: 30px; HEIGHT: 30px" height="30" alt="a_v2.gif" src="/web/20100413171346im_/http://www.bankrate.com/Images/a_v2.gif" width="30" title="a_v2.gif"/>Dear Adam,</span><br/> The phrase "don't spend it all in one place" popped into my mind as I read your e-mail. It was quickly followed by "don't let that money burn a hole in your pocket!" Your goal to pay off your <a href="/web/20100413171346/http://www.bankrate.com/calculators/managing-debt/debt-pay-down-calculator.aspx">outstanding debt</a> with your windfall may be a good one. However, I'd like to ask you some things before I comment on the <a href="/web/20100413171346/http://www.bankrate.com/finance/debt/how-to-spend-extra-money-smartly.aspx">best use of the money</a>. First, I'd like you and your wife to ask yourselves where did the $20,000 of debt come from? And is there likely to be more in the future? I've seen larger credit card debts, but $20,000 is no small number. I don't know how you came by this little bundle of gloom, but I want you to be sure it doesn't just reappear in a year or two.</p><p>Once you and your wife have an understanding on this matter, then my next question is: Do you have an <a href="/web/20100413171346/http://www.bankrate.com/finance/financial-literacy/emergency-fund-essential.aspx">emergency savings</a> cushion of six months' to a year of living expenses? The best way to avoid large credit card debt is to have money set aside for those unexpected or large periodic expenses that your regular paycheck alone can't cover, like taxes or new furniture. If your answer is no, you do not have an emergency <a href="https://web.archive.org/web/20100413171346/http://www.bankrate.com/funnel/savings/">savings</a> cushion. I would recommend putting at least half of your <a href="/web/20100413171346/http://www.bankrate.com/finance/financial-literacy/what-to-do-with-inheritance.aspx">inheritance</a> into a savings account with limited access.</p><p>Next, you didn't mention your age, but if you are in your 20s or 30s and you haven't already done so, I would contribute the maximum $5,000 to <a href="/web/20100413171346/http://www.bankrate.com/finance/retirement/traditional-ira-vs-roth-ira-1.aspx">an IRA</a>. I know you will likely earn less in interest on this money than you are paying on your car loan and credit card accounts, but what you will gain is the magic of compounded interest over time. Time is something that you cannot purchase for funding your <a href="/web/20100413171346/http://www.bankrate.com/finance/debt/4-tips-to-retirement-planning.aspx">retirement planning</a>, so if you have it, I say take advantage of it.</p><p>Now, for the answer to your question, due to the nature of cardholder agreements, (most can be changed by the card issuer), I believe if I were you I'd pay off the credit cards. The Credit Card Accountability Responsibility and Disclosure Act of 2009, or <a href="/web/20100413171346/http://www.bankrate.com/finance/debt/card-act-protects-consumers.aspx">Credit CARD Act</a>, will protect you from some of the major negatives of cardholder agreements such as universal default, but you will still have a variable interest rate loan with an amendable agreement that could be changed, and not usually in your favor.</p><p>The caution that comes with my advice is that it is imperative that you have the discipline to stop living beyond your means once you have cards with zero balances again.</p><p>Assuming you don't spend the <a href="/web/20100413171346/http://www.bankrate.com/finance/savings/use-windfall-for-retirement-debt.aspx">inheritance</a> on lottery tickets or a weekend in Vegas, there are no wrong answers here. If you are uncomfortable with the amount you owe on your car loan, particularly if you are currently upside down (owe more than the car is worth) on your loan, then you might consider using some of the money to pay down the note so it is equal to or less than the book value of the car. This will give you the option of selling the car without coming up with a chunk of cash, should the need arise. Before you take this action, be sure you do not have a penalty for early pay off included in your loan terms.</p><p>Good luck!</p><p class="fI fs11">Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by <a href="https://web.archive.org/web/20100413171346/http://www.bankrate.com/coinfo/disclaimer.asp">Bankrate's Terms of Use</a>.</p><p class="fs11 fI">Read more <a href="/web/20100413171346/http://www.bankrate.com/finance/personal-finance/advisers/debt-adviser.aspx">Debt Adviser</a> columns and more <a href="/web/20100413171346/http://www.bankrate.com/debt-management.aspx">stories</a> about debt management. To ask a question of the Debt Adviser go to the "<a href="https://web.archive.org/web/20100413171346/http://www.bankrate.com/brm/ask.asp">Ask the Experts</a>" page and select "Debt" as the topic.</p><p class="fB fs11"><img style="WIDTH: 11px; HEIGHT: 11px" height="11" alt="News alert" src="/web/20100413171346im_/http://www.bankrate.com/Images/alert_2nw_graybk.gif" width="11" title="alert_2nw_graybk.gif"/> <a href="https://web.archive.org/web/20100413171346/http://www.bankratemail.com/ae.pl?words=debt">Create a news alert for "debt"</a><div class="left width200 mar8 marTB"><div class="adLine"> </div><div class="adText">advertisement</div><iframe id="ctl00_well_ctl01" width="1" height="1" border="0" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" allowtransparency="true" style="overflow: visible;"></iframe></div><div><div class="relatedlinks width250 left mar20 marTop"><strong>Related Links:</strong><ul><li class="mar3 marTB"><a 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href="/web/20100413171346/http://www.bankrate.com/finance/financial-literacy/part-7-creating-an-emergency-fund.aspx">Creating an emergency fund</a></li></ul></div></div></p></span></p> <div class="clear"><span></span></div> <div class="storyFooter"> <div class="posted">The Debt Adviser, Steve Bucci, is the president of <a href="https://web.archive.org/web/20100413171346/http://www.moneymanagement.org/" rel="nofollow">Money Management International Financial Education Foundation</a> and the author of "Credit Repair Kit for Dummies."<br/></div> <div class="clear"><span></span></div> <div class="left"> <div class="posted">Bankrate.com's <a href="https://web.archive.org/web/20100413171346/http://www.bankrate.com/coinfo/corrections.asp">corrections policy</a></div> </div> <div class="right"> <div class="posted">Posted: Jan. 25, 2010</div> </div> <div class="subFooter"><div class="left"><strong></strong></div></div> </div> </div> </div> <div class="clear"><script 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id="ctl00_rightrail_ctl02_OvernightAveragesWidget1_oaTabs_homeEquityTab" class="tab selected" < li></ul><div class="keyLine"><div class="bgWhite pad3 padBottom"><div class="tabContentDiv"> <table cellspacing="0" cellpadding="0" border="0" width="100%"> <tbody> <tr> <td align="left" colspan="2" class="border2 borderB pad5 padRL"> <strong>Product</strong></td> <td align="center" class="border2 borderB"> <strong>Rate</strong></td> <td align="center" class="border2 borderB"> <strong>+/-</strong></td> <td align="center" class="border2 borderB"> <strong>Last week </strong> </td> </tr> <tr> <td height="18" align="left" class="bgListBlue pad5 padRL"> <a href="/web/20100413171346/http://www.bankrate.com/funnel/home-equity/?prods=437&ic_id=OA_HomeEquitynotab_6_HomeEquity_30KFICO-basedHELOC_Grid_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"> 30K HELOC </a> </td> <td align="center" class="bgListBlue pad5 padRL"> <a id="ctl00_rightrail_ctl02_OvernightAveragesWidget1_oaTabs_homeEquityTab_Repeater1_ctl01_HyperLink1" href="/web/20100413171346/http://www.bankrate.com/funnel/graph/?cat=8&state=zz&d=1825&t=Line&ids=30&ic_id=OA_HomeEquitynotab_6_HomeEquity_30K FICO-based HELOC _Graph_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"><div class="graph-oa"></div></a> </td> <td align="center" class="bgListBlue pad5 padRL"> 5.15% </td> <td align="center" width="15" class="bgListBlue pad5 padRL"> <div class="arrow-down-gold"></div> </td> <td align="center" class="bgListBlue pad5 padRL"> 5.17% </td> </tr> <tr> <td height="18" align="left" class="pad5 padRL"> <a href="/web/20100413171346/http://www.bankrate.com/funnel/home-equity/?prods=438&ic_id=OA_HomeEquitynotab_6_HomeEquity_30KFICO-basedHomeEquityLoan_Grid_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"> 30K Home Equity Loan </a> </td> <td align="center" class="pad5 padRL"> <a id="ctl00_rightrail_ctl02_OvernightAveragesWidget1_oaTabs_homeEquityTab_Repeater1_ctl02_HyperLink1" href="/web/20100413171346/http://www.bankrate.com/funnel/graph/?cat=8&state=zz&d=1825&t=Line&ids=240&ic_id=OA_HomeEquitynotab_6_HomeEquity_30K FICO-based Home Equity Loan_Graph_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"><div class="graph-oa"></div></a> </td> <td align="center" class="pad5 padRL"> 7.82% </td> <td align="center" width="15" class="pad5 padRL"> <div class="arrow-down-gold"></div> </td> <td align="center" class="pad5 padRL"> 7.88% </td> </tr> <tr> <td height="18" align="left" class="bgListBlue pad5 padRL"> <a href="/web/20100413171346/http://www.bankrate.com/funnel/home-equity/?prods=507&ic_id=OA_HomeEquitynotab_6_HomeEquity_50KFICO-basedHELOC_Grid_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"> 50K HELOC </a> </td> <td align="center" class="bgListBlue pad5 padRL"> <a id="ctl00_rightrail_ctl02_OvernightAveragesWidget1_oaTabs_homeEquityTab_Repeater1_ctl03_HyperLink1" href="/web/20100413171346/http://www.bankrate.com/funnel/graph/?cat=8&state=zz&d=1825&t=Line&ids=522&ic_id=OA_HomeEquitynotab_6_HomeEquity_50K FICO-based HELOC_Graph_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"><div class="graph-oa"></div></a> </td> <td align="center" class="bgListBlue pad5 padRL"> 4.83% </td> <td align="center" width="15" class="bgListBlue pad5 padRL"> <div class="flat-gold"></div> </td> <td align="center" class="bgListBlue pad5 padRL"> 4.83% </td> </tr> <tr> <td height="18" align="left" class="pad5 padRL"> <a href="/web/20100413171346/http://www.bankrate.com/funnel/home-equity/?prods=457&ic_id=OA_HomeEquitynotab_6_HomeEquity_75KFICO-basedHomeEquityLoan_Grid_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"> 75K Home Equity Loan </a> </td> <td align="center" class="pad5 padRL"> <a id="ctl00_rightrail_ctl02_OvernightAveragesWidget1_oaTabs_homeEquityTab_Repeater1_ctl04_HyperLink1" href="/web/20100413171346/http://www.bankrate.com/funnel/graph/?cat=8&state=zz&d=1825&t=Line&ids=472&ic_id=OA_HomeEquitynotab_6_HomeEquity_75K FICO-based Home Equity Loan_Graph_inheritance-save-or-pay-off-card-debt.aspx_debt_finance"><div class="graph-oa"></div></a> </td> <td align="center" class="pad5 padRL"> 8.77% </td> <td align="center" width="15" class="pad5 padRL"> <div class="arrow-down-gold"></div> </td> <td align="center" class="pad5 padRL"> 9.68% </td> </tr> </tbody> </table> <div class="oa-foot modfoot-border2" id="Div1"> <nobr><div class="tang-bkgd right mar5 marLeft"><input id="ctl00$rightrail$ctl02$OvernightAveragesWidget1$oaTabs$homeEquityTab$OA_BankRateButton2" type="button" name="ctl00$rightrail$ctl02$OvernightAveragesWidget1$oaTabs$homeEquityTab$OA_BankRateButton2" class="tang-btn right" value="Search" tabindex="0" 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