It's a common dilemma in personal finance: Should credit card debt be tackled first or should some of that money be saved in an emergency fund? To answer this, it helps to get some background on debt. Debt by definition is something owed — in this case money — to a person or business.1 And there's no shortage of borrowing: Individuals in the UK collectively borrowed a net £0.6 billion on credit cards in July 2022.2
This article includes tips, suggestions, and general information. We recommend that you always do your own research and consider getting independent tax, financial, and legal advice before making any important decision.
The goal for many people is to clear debt to achieve financial security. But not all debt is bad. Some can lead to long-term financial gain. So, is it better to pay off debt or save? This article helps answers that question and explains the concept of good debt vs. bad debt, how credit cards work, and tips on when to prioritise paying off debt or saving money.
Money in the form of a loan is called debt. Some types of debt, such as mortgages and auto loans, are secured because they're backed by collateral. Others — including credit cards, personal loans, and student loans — are often unsecured.3
Unsecured debt can involve high interest rates. Those who have incurred high-interest debt, from credit cards or an overdraft, for example, might want to prioritise it to avoid having to pay those high-interest charges.
Doing this can help improve someone's personal finance snapshot even if it's difficult to do. Because, the more people pay down high-interest debt, the better their credit scores could become.4
Once high-interest debts are under control, there are many reasons why someone may want to start saving money. Because the next financial emergency could be just around the corner.
Building an emergency fund is an important part of the financial goal-setting process. Other steps include creating a budget and setting achievable personal financial goals.
But how much should you save? Experts suggest putting away the equivalent of three to six months of living expenses in an emergency fund that can be easily accessed. Those who open a savings account and start adding small amounts of money regularly could slowly build up those emergency savings while also creating a savings habit.5
Putting aside money can happen at the same time as paying down debt, especially in the case of good debt.
What exactly is good debt vs. bad debt? In basic finance terms, debts are loans that come with predetermined terms and conditions and interest charges. While all debt needs to be paid back over time, some debt can be better than others:4
Some kinds of debt can increase a person’s standard of living and are considered good debt for a household and the economy. Examples of good debt include:2
A debt is still a debt, however, and it’s never a good idea to keep overspending beyond one’s means. Some debts belong in the category of bad debt, including:
When it comes to financial questions, such as whether to pay off debt or save, it’s important to do the research needed to make an informed decision.
Part of that process is to regularly assess personal finances, especially when it comes to savings and credit. A financial technology platform, such as PayPal, can help keep track of credit card charges.
Broadly speaking, the long-term goal should be to clear debt and setting aside money.