Got spare cash? Then pay off your debts first… - Debt - News - Moneyfacts

News

Got spare cash? Then pay off your debts first…

Got spare cash? Then pay off your debts first…

Category: Debt

Updated: 08/04/2014
First Published: 08/04/2014

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

You've budgeted, paid all your bills, lived comfortably for the month and still have a bit of money left over by payday. Congratulations! But just what should you do with it? Well, blindly spending it should never be an option – you might as well make it work for you, and that's why a lot of money-savvy individuals might like to put that extra cash in a savings account.

However, it might not always be the best solution. It might be tempting to squirrel away that spare cash but if you've got existing credit card debts or overdrafts then you ALWAYS want to pay these off first before putting any disposable cash in a savings account. Why? Well, you just need to think about how much you're spending in interest compared to how much you're getting from a savings account…

Saving vs. debt clearing

Let's say you had £2,000 on a credit card. Even a modest purchase rate of 16.90% APR would see you pay upwards of £300 per year in interest, and with many rates being in the region of 18.90% you could end up paying even more.

And that's before we even start to think about the higher rates associated with cash withdrawals or balance transfers, and what about overdrafts? It can soon add up, and if you only make the minimum payment each month you'll find it tough to reduce the balance.

Now, let's compare it to a savings account, using the same £2,000 figure. Even if you put that entire lump sum in the top-paying one-year ISA from Metro Bank (currently offering 1.75%) you'd earn just £35 over the year, and if you regularly put smaller amounts into an easy access version you'd earn even less.

As you can see, if you're putting money in a savings account rather than paying off debt, you're instantly losing out. £300 you're spending compared to the £35 you're earning? It's a no-brainer, and even if you can't afford to pay off all your debt in one go, it still makes sense to use any spare cash you have to bring the balance down a bit.

What about balance transfer credit cards?

Of course, if you're serious about clearing your debt and won't be using your credit card for future purchases, you'll want to think about transferring the balance onto a 0% balance transfer card. You'll need to make sure you can clear the debt in full before the interest-free period ends, however, and that means you'll still want to consider using your spare cash to reduce the balance as minimum payments invariably won't be sufficient to clear it.

So, don't even think about putting that spare cash in savings before you've paid off your debt. That extra interest you're paying out on your credit card or overdraft could be put to far better use elsewhere, and once you've cleared it you'll be paying out less – and will have more money to put in a savings account. It's win-win.

What next?

Compare balance transfer credit cards

Find a savings account that pays the top rate (once all your debts are paid off)

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

Related Articles

Millennials losing sleep over debt

Money worries can keep people up at any age, but new research has found that a staggering one in four adults under 34 have lost sleep over financial troubles. Many are feeling pressure not just from their bank account, but also their loved ones.

Would you go into debt to bag a bargain?

It can be hard to resist the lure of a bargain, particularly at this time of year. However, while it should be a way to cut costs, it seems that some get carried away, and end up spending far more than they should – and get into debt as a result.

Overdraft charges add millions to problem debt

Charges on unarranged overdrafts are spiralling, says StepChange Debt Charity, adding millions to problem debt – and there are calls for them to be capped as a result.
 
Close