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Why You Should Pay Off Your Credit Cards Rather Than Save Your Money

Published by admin on March 17, 2010

Why You Should Pay Off Your Credit Cards Rather Than Save Your Money

Did you know that if you make the minimum monthly payment on your credit card it will take you more than forty years to pay it off? That’s assuming you stop using your card and don’t run up anymore debt, not very likely. Even worse you will pay more than times the amount you borrowed in interest, clearly paying the minimum is not really a good financial plan. The odd thing is that most people who are paying just the minimum each month are actually capable of making much longer payments. Unfortunately we are making a mistake because of one of those lessons we all learned as children.

I am sure that as a child you were constantly being told how important it is to save your money, and this is generally a good idea. The problem is that advice doesn’t factor in the outrageous interest rates being charged on credit card debt. If your debts are rising faster than your savings, which they almost certainly are if you have credit card debt, you aren’t really getting ahead by saving your money;.

Credit cards frequently have interest rates of somewhere around twenty percent, your savings account probably pays an interest rate of less than four percent. You should be able to see the problem here, your credit card debt will grow at a much faster rate than your savings. Paying off your credit card debt means that you are effectively investing your money at the interest rate being charged by your credit card company. If you can find and investment that can consistently return twenty percent a year, let me know where. Even if you could find such an investment you would still be better off paying your credit card debts rather than saving.

The reason that you would still be better off paying your credit cards is that investment income is taxable. Even if you could find an investment that returned twenty percent a year for many years, you would still be falling behind if you have credit card debt. Realistically you would need to be getting a return of closer to thirty percent to make saving a better investment than paying off credit card debt at twenty percent.

It should be obvious that your credit card debts will grow at a faster rate than your savings, so you need to pay off your creditors as fast as you possibly can. Even if this is at the expense of your savings, the sooner you get your credit card debt taken care of the better off you will be and the faster you will be able to save your money.

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