BALANCE OUT
Is it better to pay off debts or save money? Experts weigh in
Experts explain in which situations you should prioritise paying off debt and putting aside savings
MANY people hate the idea of being in debt and want to clear it as quickly as possible.
But, is it always best to put your spare cash towards paying what you owe, or is it sometimes better to funnel it into savings and grow a pot you can use to clear it later?
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The answer isn’t as straightforward as you might think.
It depends on what kind of debt you have, how much interest you’re paying, whether there is an early repayment charge, and how much your savings would earn in interest.
To help you make the best financial decisions for your circumstances, The Sun spoke to three financial experts to find out when it’s best to clear debts, and when you might be better off saving instead.
Paying the minimum each month
It's important to always at least make the minimum monthly repayments on any debts you have, whether that’s on your mortgage, credit card bill, or a loan.
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Missing or late payments will negatively impact your credit score, making it harder to borrow money in the future.
Multiple missed payments could result in your debt being sold to a collection agency, county court judgements, and, in extreme situations, you even needing to declare bankruptcy.
Set up direct debits to ensure that those minimum payments come out each month, and then you can decide what to do with spare cash left after that.
If possible, it's best to clear the entire balance as this means you won't pay any interest at all.
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Having a rainy-day fund
Experts all agree that it’s important to have a rainy-day savings fund set aside for emergency bills, such as a boiler breakdown or car repairs.
If you don’t have money stashed away, you might want to consider doing that before you start overpaying your debts - as if you land a big bill you can't afford, you may just end up in more debt.
Reme Holland, a partner and chartered financial planner at Albert Goodman, said: “It is always advisable to have an emergency fund, and this should typically be between 3-6 months’ worth of outgoings kept in an instant access savings account.”
One exception to this rule is if you have high-interest credit card debts you’re paying off.
In this case, clearing the debt faster will mean paying significantly less interest, and you could then use the card for emergencies.
However, once the credit card debt is paid, you should funnel what you were paying into a savings account to build up an emergency fund as soon as possible.
An even better alternative would be to try and move the credit card debt to a 0% interest card if you qualify for one, or for the lowest rate card you can find.
Amelia Murray, money expert at Be Clever With Your Cash, said: “Check if you can shift any debt you have to a 0% deal or lower interest rate.
"That way more of your payments goes towards paying down your debt, and not interest charges. You can also keep some back in savings.”
Making your money work for you
If you’ve already got a rainy-day fund set aside, then whether to clear debts faster or save money often comes down to how much interest you’re being charged, versus what your savings will earn.
This will often depend on what kind of debt you have. People with older fixed-rate mortgages may have very low interest rates that are easily beaten by savings accounts. However, someone with a payday loan will be paying far more in interest than they can earn from savings interest.
In a nutshell, this comes down to simple maths. If your mortgage is at 3%, and a savings account will pay you 6%, you’d be better off saving the spare cash and then funnelling it into your mortgage when your deal comes to an end.
Holland explains: “It is important to look at the cost of borrowing the money vs. the interest or return generated from your savingg.
"If the cost of borrowing, is in excess of any funds sat in a savings account, (assuming this is not your emergency fund) it is worth repaying the borrowing and saving the interest costs.”
Ms Murray added: “It’s likely that your bank or loan provider will be charging you a monthly interest rate so paying the debt off more quickly will mean you’re paying less money in interest in the long term.
"Debts usually cost more to keep than savings earn, so it makes sense to clear them first.”
One thing to consider is that once you’ve paid money towards a debt like a mortgage or loan, it’s hard to get that cash back if you need it.
Of course, you might be able to take out a new loan, or remortgage, but you might not get as good a rate in the future.
It’s important to think about your future financial needs and when you might need credit when deciding what to do.
If you know you’ve got big expenses coming up, it might be better to save up with your spare cash, rather than trying to pay off a mortgage or loan more quickly.
Checking for early repayment fees and charges
The type of debt you have is very important when deciding whether to put spare cash into savings or try and repay what you owe faster.
With credit cards, there’s no penalty for paying them off quickly, so this can be sensible approach.
However, both mortgages and loans often come with early repayment fees and charges.
Your mortgage will often allow you to pay up to 10% extra each year without a fee, so this is worth considering unless you can beat the rate with a savings account.
For anything above that, the repayment fees are often very expensive and could mean you pay more in charges than you save in interest.
A better approach in this case would be to save the cash, earn the interest, and then use it on your mortgage when your deal ends.
Loans also often have early repayment fees built in. You can do a calculation to see whether you’d be better or worse off by comparing the interest you’d save to the amount you’d be charged.
If you’re going to be worse off, then you should save the money instead.
How to shift your credit card debt quickly
By James Flanders, Consumer Reporter
UK Finance reports that we spend a whopping £2 billion a month using our credit cards.
While that little strip of plastic makes everyday spending easy peasy, it comes at a huge cost.
According to The Money Charity, the average credit card debt sits at £2,485 per household or £1,312 per adult.
And if you're stuck on a credit card with a high APR and only making the minimum repayments, you could be forking out hundreds of pounds extra in interest charges.
For example, if you owe £1,312 on your credit card and are charged 24.8% APR.
If you don't make any more transactions and pay £100 a month in repayments, you will pay off the card by September 2025 but at £207 in interest.
However, by hunting around for a better deal elsewhere and switching to a balance transfer credit card with a lengthy interest-free period, you can save yourself £162.
If the same person was accepted for a 28-month-long zero-interest credit card with a 3.4% balance transfer fee and made the same £100 repayments each month.
They would pay off the debt sooner, in July 2025, and only fork out £45 towards the 3.4% balance transfer fee.
Before taking out a new credit card or increasing the amount you borrow, it's vital to consider the consequences.
You should only borrow money if you can afford to pay it back.
It's always vital to ask yourself if you need to borrow before committing to a new credit card, personal loan or overdraft.
If you use a credit card, I'd recommend that you always pay off your balance in full at the end of each statement period.
Lenders have a responsibility to help customers who are in debt.
If you're in a debt crisis, your first point of call should be your lender.
They might help you out by offering you a reduced interest rate or a temporary payment holiday - so check in with your lender if you're struggling.
If you’re planning to apply for a mortgage or car loan
If you’re planning a big purchase that you’ll need credit for, such as a home or car, you need to consider your credit rating when deciding whether to save or clear debts.
Your credit score gives an indication of your financial attractiveness to lenders, based on your borrowing track record and current obligations. Usually, a high score indicates low risk, which will give lenders confidence you’ll manage a new account responsibly.
While you’ll want the biggest deposit possible for a house, the debts you already have will impact how much the bank is willing to lend you and what rate they will charge.
James Jones, from Experian, said: “Avoiding missed payments is helpful, as is not already being heavily indebted to other lenders.
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“Using spare cash to reduce existing borrowing can positively shift the dial on your credit score. And this can be especially helpful if you’re approaching a big application like a mortgage or car loan, where your current unsecured debt level will certainly be put under the microscope.
“For example, reducing a credit card balance to no more than 25% of the card’s limit can raise an Experian score by up to 90 points.”
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