Should You Invest if You Still Have Credit Card Debt?

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You may be surprised at the answer.

Key points

  • Credit card debt comes at a high interest rate.
  • It often makes sense to focus on paying it off before you begin investing.
  • There's one exception to this general rule of paying down credit cards before investing.

Investing your money is important to building wealth. But you need to make certain you're ready before you start using your cash to buy investments. If you have a lot of credit card debt, you may not be in a position to invest much.

How do you decide if you should focus on using your spare cash to pay your credit cards off or if you should invest at least some of it for the future? Here's what you need to know.

When it makes sense to invest with credit card debt

Investing when you have credit card debt is often not the best move because of the high interest rates credit cards have.

When you have a limited amount of money, as most people do, you have to decide how best to use it to maximize the return on investment it provides. In most cases, paying off credit card debt is going to provide a better return on investment than just about anything else you could do with the money.

Putting your money into the stock market, for example, would realistically provide around a 10% average annual return if you built a diversified portfolio that presented a reasonable risk. Chances are good your credit card has an interest rate that's well above 10%. If you have a choice between using your extra money to repay credit card debt that's charging you 17% interest or investing to possibly get a 10% average rate of return, the credit card debt should clearly be your focus.

The one exception to this investing rule

There is one exception to this rule: If your employer provides a 401(k) matching contribution when you invest in your workplace retirement plan. If your employer matches contributions you make, that's free money. The specific return you get will depend on the percentage of contributions the company matches, but it's common for employers to match 50% or 100% of contributions up to a certain percentage of your salary. So, investing enough to earn the full employer match could end up giving you a return on investment of around 50% to 100%.

If you have this option, it makes sense to invest enough in your 401(k) to earn your employer match. You can do this with your spare money after you've paid the minimums on your credit card debt. Paying the minimums is necessary first; otherwise, you could damage your credit and affect your future ability to borrow, live where you want, or find work. Then, with anything left over after paying the minimum on your cards and earning the employer match, you'll want to focus on repaying your credit card debt ASAP by making extra payments that are as large as possible.

While repaying credit card debt may not seem as exciting as investing, it's likely going to do more to help improve your financial picture in the long run. The more extra cash you put toward becoming free of credit card debt, the sooner you can pay your balance off in full and free up tons of spare cash to start investing in assets that can help you build wealth over time.

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