Investing When You Have Credit Card Debt

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man with large debt

Many investors want to know if they should invest while they have credit card debt. In the majority of cases, it’s a wise choice to pay off your credit card debt before investing. However, there are some circumstances where this rule does not apply.

High interest debt is considered debt that is an interest rate above 10%. Financial experts agree that it is important to pay this debt off before you begin investing. Why? High interest debt will normally not be offset by the growth of your investments.

A good example of this is a credit card that has 10% interest. Your investment does not exceed a 10% return, you’ll benefit more from paying off your credit debt.

If you have a promotional offer where you have a 0% interest credit card, you’ll want to make sure that you can pay off this credit card successfully while also investing your money. It’s always important to weigh the return you would receive on an investment versus how much interest is accrued on your credit card debt. If your credit card debt outweighs your investment returns, always pay your credit card debt first.

Paying your credit card debt is one of the smartest investments you can make because it increases the amount of cash flow you have at the end of the month and reduces your debts in the process. It’s an investment in the “now” with immediate results.

There are two methods that financial experts recommend when trying to pay off your credit cards. One is the snowball effect where you pay off your lowest credit card, and roll the payments into your next lowest credit card amount. The issue with this is that you’re not taking into account the interest that will accrue on the account. For example, you may be paying off cards that have lower interest rates and lower balances overall, while cards with higher balances at higher interest rates remain stagnant.

In terms of an investment, it’s better to pay off the card with a higher interest rate first because it saves you money in the long run.

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