Is it better to save money or pay off credit card debt?
Millions of people across the UK have credit card debt. If you’re one of them, you may be wondering about the best way to pay it off. Ideally, you’d repay as much as you can as quickly as possible, to prevent more interest accumulating over time. But what if you must decide between paying off your debt and saving money each month?
There’s no one-size-fits-all answer to the question of whether you should save money or pay off credit card debt. The right choice depends on your unique circumstances. Read on to learn more about whether you should save or pay off debt, and how a Debt Management Plan (DMP) could help.
Understanding credit card debt
Before deciding whether to pay off your credit cards or save money, it’s crucial to understand how credit card debt works.
When you make a purchase using a credit card, you’re borrowing money from the card issuer. If you don’t repay the full amount by the due date, interest is charged on the remaining balance.
The interest rate will vary depending on factors such as the type of card and the provider and is typically expressed as a percentage of the overall debt. It compounds, meaning you’re charged interest on the existing interest as well as what you borrowed.
To reduce your credit card debt, you should aim to pay more than the minimum payments required each month. The minimum payment primarily covers the interest, with only a small amount (if any) going towards the bulk of the debt. Over time, this can cause your debt to grow exponentially, leading to strained finances and a prolonged repayment period.
Should you pay off credit card debt or save money?
In an ideal world, we’d all be able to pay off our credit card debts in full each month while also adding to our savings accounts. However, if you owe a substantial amount of debt or are on a low income, this may not be possible. You may have to make a difficult choice: pay off credit card debt or save.
This decision is not always straightforward, as it largely depends on your financial circumstances. To help you decide where your priorities should lie, here’s a step-by-step guide.
01. Create a budget
Begin by assessing your monthly income and the cost of any essential outgoings, such as:
- Rent or mortgage payments
- Council tax
- Utility bills
- Transport costs (e.g. fuel and car insurance, or bus tickets)
By subtracting your necessary expenses from your income, you can determine the surplus amount available either for savings or debt repayment. This is also the perfect time to identify any non-essential expenses that can potentially be reduced, freeing up more funds.
Remember, a realistic budget is more likely to be successful, so avoid overstretching yourself.
02. Establish an emergency fund
Before diving into aggressive debt repayment, evaluate your savings. If you have little to no money saved up for a rainy day, it may be a good idea to prioritise saving some of your income each month first. Having even a small emergency fund for unforeseen expenses, such as job loss or vital home repairs, can help prevent you from needing to borrow even more money in future.
If you already have some savings, and you’re contemplating using this money to clear your credit card debt, ensure you keep some of it back just in case.
03. Prioritise your debts
If you’re juggling multiple debts, it’s essential to determine which ones demand immediate attention. Priority debts, such as council tax, rent arrears and gas bills, can have severe repercussions if left unpaid. While credit card debts are significant, they are considered non-priority debts, so they might not always be the first you should tackle.
Also, consider the size of each debt. Larger debts can accrue interest faster, making them costlier in the long run. So, you should aim to pay more each month towards your biggest debts.
04. Compare interest rates
If you have money left over each month to pay towards your credit card debt, the next step is to compare interest rates. Determine how much interest you’re being charged on your credit card debts and compare this to the potential interest you could earn from savings accounts.
If the interest on your debt surpasses potential savings interest, it may make sense to prioritise paying off the debt sooner. High-interest savings accounts might offer competitive rates, but often, credit card interest can outpace these gains.
05. Aim to find a balance between savings and debts
Striking a balance between saving and debt repayment is the ideal scenario to aim for. If possible, aim to save a little money each month while repaying your credit card debt – even if it’s a small amount. Bear in mind that to clear your credit card debt completely, you’ll need to make more than the minimum repayments, so take this into account while calculating how much you can save.
How a debt management plan could help
If you’re dealing with multiple non-priority debts, such as credit cards and personal loans, a debt management plan (DMP) could offer a potential solution.
A DMP consolidates your debts into one monthly sum, helping to simplify your finances. Your DMP provider will help you establish a budget and determine an affordable monthly repayment, allowing you to cut down your debts while saving a little for emergencies. Additionally, through negotiations with your creditors, they can often reduce or freeze interest rates on your existing debt, stopping it from snowballing over time.
With a clear repayment schedule and end date in sight, debt management plans offer a structured path to becoming debt-free. However, they are not the right solution for everyone, so it’s important to seek professional advice before making a decision.
Contact DFH Financial Solutions for tailored debt advice
Whether you owe a little or a lot, dealing with credit card debts can be a struggle, especially while trying to save money. If you’re looking to simplify your monthly repayments and get your financial future back on track, contact DFH Financial Solutions today.
Our team of experts will help match you with a custom debt management solution tailored to meet your unique needs. Apply online to find out how we could help you on your journey to financial freedom.Get Debt Help