It’s a question many people ask this time of year. The holiday season is just about over and we can finally remember what day of the week it is. But, as we sluggishly return to our day-to-day lives, we know our festive overspending has left many of us with credit card debt.
So, do we try and stick to our New Year’s resolution of giving our savings a boost? Or is it better to clear the credit card balance so we can start afresh? It can be hard to know what to do first.
When you have existing debt, there are pros and cons to saving. Everyone’s financial situation is different, so there’s no one-size-fits-all approach. We’ve outlined some of the most common factors so you can weigh up what’s important for you.
Key considerations
- Overall cost vs peace of mind
Comparing the interest rates on your credit card and your savings will help you see what’s cheaper overall. Credit card interest rates are typically higher than the returns on savings, so you might want to pay off the debt first. However, if paying off the full credit card balance leaves you without any savings at all, it might make sense to pay off the debt gradually and leave yourself with a small savings buffer that you can use in an emergency. After all, everyone could use a financial safety net. Being able to save – no matter the amount – might also provide you with a sense of security and help you to relax. It could help you sleep better, too.
- Short- and long-term goals
Focusing on your financial goals now and in the future could help you strike a balance between paying off debt and saving. While being debt-free now might seem like the most comfortable thing to do, do you want to get on the property ladder? If buying your first home is the ultimate long-term goal, maintaining a manageable credit balance now could help build your credit profile. This is important as lenders look at this when assessing your suitability for a mortgage, so working on this now could make you a more attractive candidate when you come to apply. Having a goal in mind might also give you that impetus to save and build a sizeable pot for that deposit!
- Rewards and 0% credit
Many credit card companies offer interest-free periods and rewards to entice you to apply. If you’re currently battling with a high interest rate on your current credit card, you could consolidate the debt by transferring the balance to a new card offering 0% interest. You could use the interest-free period to pay more off your debt, or you could use the time to repay the debt and earn interest on your savings at the same time. You could also benefit from growth by putting some money into investments, or, if you’re eligible, earn bonuses from schemes such as Help to Save.
If you are worried about your debts, check out our support page where we have links to organisations and resources that are there to help you.
Whatever you choose to do, remember: it’s never too late to start saving!
