InSight

Should you pay off your credit card or save?

Financial Planning Dentist

The short answer is usually to always pay off high interest erosive debt like a credit card first (The First 8 “Good” Money Habits).

You cannot consistently return more than credit card interests rates, therefore, you should pay it off before you start saving. Credit card debt hurts your credit score and your ability to save. Although it is sometimes necessary to get through a difficult time, we recommend avoiding it at all costs. Interest rates on credit cards usually never get below double digits and average around 18-25%.

Our rule of thumb is that if you cannot consistently, key word being consistently, earn more than the interest you’re being charged for the debt you’re taking on then you should pay that debt off as soon as you can before doing anything else.

For small business owners, sometimes you need to take on debt in order to grow your business and that’s okay if you don’t do it through credit cards. Taking on debt to grow a business or to further your education is what we call accretive debt. Typically, you can get a bank loan with an interest rate between 3-10% for a business (lower if you have consistent cash flows and good credit and higher if you have little to no income and an average to lower credit score). However, if you decide not to get your affairs in order by getting a bank loan (you’ll need a business plan and income records) and you decide to take the easy way out then you’ll take on debt that will be extremely costly to get out of. 

For example, let’s say you take on $10,000 of credit card debt at a 20% interest rate. If you decide to make small payments like let’s say $250 a month then it will take you 67 months to pay off and you’ll end up paying $6,616 in interest. Meanwhile, the business owner that had a business plan and records in order took out a $10,000 loan and paid it back in 45 months while only paying $1,185 in interest.

More related articles:

Pin It on Pinterest