Paying Off Credit Card Debt is A Great Investment

by RC on March 29, 2011

Everyone likes getting good returns on their savings and investments, right?

Whether its your 401k plan, emergency fund, or just money you have sitting around with no real purpose, getting the most for your money, and the highest interest or returns you can get, is frequently something think about- some people even obsess over it. After all, it’s your money, why not get the best return you possible can?

Frequently, your returns are based on your risk level- for example, in your 401k you may be invested mostly in stocks if you aren’t expecting to retire (and therefore won’t need it) for a long period of time -say 20 to 30 years.

On the other hand, for money you want to keep accessible and don’t want to risk any of it to the ups and downs of the stock market, you may keep that in an bank account, CD, or savings bond.

The problem with these types of savings or investments (even though you may consider them “savings”, they can still be considered investments) is that over the past few years, interest rates have been really low- most online bank savings account interest rates hover around 1% to 1.25% +/- right now, and CD rates are equally low, depending on the length of the CD.
One thing to keep in mind if you are carry credit card debt, particularly the high interest type-

Paying off credit card debt is a great investment.

If you have credit card debt at anything but 0% interest, you should strive hard to pay it off as quickly as you can. Its nothing but a liability, and paying 10%, 15%, 20% or even higher for credit card debt will keep you in a bad financial condition for a long time.

Paying off that credit card debt is a guaranteed return- If you credit card charges you 10%, ever dollar you pay off saves you $0.10 over the course of a year. Obviously it’s even more if your credit card charges 15%, 20% or higher.

That is why paying more than the minimum is so important- paying the minimum usually isn’t paying off much more than the interest you are paying every year, and progress is very slow when you do that.

Getting out of credit card debt can really send you down the path to financial success, so if you  have a little extra money in a bank account earning 1% (which some people do- probably more than you or I think), throw it at your debt for a quick, guaranteed return. Finding  ways to earn or save  more money or even a zero percent balance transfer can help you speed up your credit card payments as well.

Remember, in a world where reward (high interest or return on investments or savings) usually involves risk , paying off high interest credit card debt is a guaranteed winner.

This article was featured in the Carnival of Personal Finance at Funny About Money.

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{ 2 comments… read them below or add one }

Josh April 1, 2011 at 11:50 am

Great point. It is funny that people don’t automatically realize that if you have a high interest rate, paying that off is saving you a great deal of cash.

And it’s also interesting that it works with paying cash for things as well. If you pay cash for something you need to realize you are LOSING out on the interest you would normally be making on your money invested. That is why paying for cash is obviously better than financing, but on the other hand there are better options than paying cash.

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Pat S. April 4, 2011 at 9:45 am

Great point! I pay my credit card off monthly. But if I was unable to do so, or was carrying a balance, the interest rate is 17.25% APY. That’s a heck of return on investment, if you are in debt.

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