Should you pay off your credit card or save?

With savings rates so low, wouldn't it make sense to use them to clear any debt you have instead? After all, if your savings are earning less than 2%, and your credit card debt is racking up interest of around 18%, it seems like a no brainer.

But leaving yourself with no savings to fall back on can also land you in financial hot water should things go wrong – and you don’t want to have to borrow again, potentially at even higher interest rates.

Managing your savings, as well as your debt, is therefore a bit of a juggling act, so here we show you how to do this effectively.

The importance of savings

Having a savings nest egg can really help to cushion you from life’s little blows – and of course, will help you to deal with the big ones too. Ideally you should have a savings pot equivalent to at least three months' salary – six months is even better.

But, with purse strings stretched to the max for many of us right now, finding spare cash to put aside into a savings account each month is proving to be a bit of a challenge.

That's why it can pay to make small lifestyle changes such as cutting back on meals out and cycling rather than driving to work. Even the little things can make a difference.

And some banks also offer schemes which can help you to save. For example, your bank might automatically 'sweep' any money you have left over in your current account at the end of the month into your savings account.

It's also vital that you shop around for the best savings rates, so that the money you do save is working as hard as possible for you. A cash ISA should be your first port of call because you won't pay income tax on the interest you earn. You can invest up to £5,760 into a cash ISA in the current tax year. Compare cash ISAs with MoneySuperMarket.

The importance of clearing your debts

But while saving is important, so is clearing your debt. Debt repayments can really eat into your income – especially if you are paying high interest rates. So you'll want to clear your debt as quickly as possible.

But one way to tackle expensive credit card debt, and give your savings a boost at the same time, is to shift your debt onto a 0% balance transfer credit card. By doing so, you'll be able to enjoy up to 30 months interest-free – giving you more than two years to pay off your debt without worrying about the interest stacking up. The money you save in interest could then go into your savings account.

However, bear in mind that these cards usually come with a fee of around 3% - if you were to transfer debt of £3,000 you'd pay £90 - so you should take this into account. Some 0% balance transfer cards come with smaller fees, but they usually have shorter interest-free periods. However, if you know you can clear your debt before the 0% shelter ends, this is an option worth going for.

It's really important that you do pay off your debt in full before the 0% window ends, as otherwise you'll start paying interest at a rate of around 18.9% APR. So work out how much you need to pay off each month in order to do this. Minimum monthly repayments on credit cards are typically set at very low levels, so always try to pay off more than this if you can.

For example, if credit card A offers 0% on balance transfers for 30 months with a 3% fee, and you have a £3,000 debt, you'd need to pay off £103 a month (taking the £90 fee into account) to have cleared your debt within 30 months.

Bear in mind that if you miss a payment on your credit card you risk having the 0% shelter taken away from you and you could damage your credit record.

Avoid spending on your balance transfer card too as this will only undo the good work you've already done.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.


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