Should you invest or clear off credit card debt first?

If you have outstanding credit card debt, you might be considering making an investment, the income from which you expect would help make it easier for you to pay back your debt.

Most financial planners would advise against it, however, because it takes time to actually earn from new investments, and with any kind of investment – whether buying stocks, bonds, or venture capital – there is always some degree of risk involved. On the other hand, there are some safe investments that you can look into but it is rather rare to be able to find one that is low-risk and offers a higher return than your credit card interest rate.  

It is definitely essential that you give the matter careful consideration before making a decision on whether you want to pay credit card debt or invest the money elsewhere instead. Some things to think about:

Investments are inherently risky. The burden of risk on your finances grows even bigger if you decide to use money you are supposed to use for paying credit card bills to investing. Even if you are to take on a loan which you intend to use specifically for an investment, you also take a major risk – loans also come with interest. Most investments do not have a guaranteed return rate. Even if for instance, you manage to find yourself a low-paying investment, steep loan (and credit card) interest rates have a way of catching up.

Structure a debt payment strategy. Ideally, you would be debt-free, have enough savings, and enough extra funds that you can choose to use however you want to. It’s easy to incur a debt but obviously much harder getting out, so getting your debts in order might be the wise thing to do. If you have a lot of credit card debt, you can choose to do one of two things: either pay off ones with the highest interest rates first or ones with the smallest balances first, which would allow you a little more legroom enough to pay off other debts.

How’s your savings situation? A better idea would be to budget credit card payments and savings into your monthly expenditures. A reason why you might be in this kind of dilemma – to invest or to pay off credit card debt – might be because you have a substantial amount of cash on hand, making the opportunity to grow it even larger rather tempting. If things are going smoothly for you, financial wise, why not save some of the money instead in a secure and easily accessible deposit account? Finance experts suggest building a savings fund that is worth at least three times as your monthly salary so you are prepared in case of a sudden loss of employment or medical expense.

Paying debt is an investment. Doesn’t the idea of being free from debt appeal to you? While you don’t have to hurry into paying your credit card balances in full (you can actually be penalized for doing so), you definitely must pay your monthly credit card bills on time and not a ringgit less than the required minimum. Credit card debts can easily “snowball” if you fail to do so. Think about how the money you would be paying on interest could have been of better use to you and your household.

*Author’s Bio: Article written by Compare Hero, the most comprehensive financial comparison service in Malaysia.  Compare credit cards, broadband plan, and others at a competitive price.

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