Deciding to pay down debt or save money can be a dilemma for many.  You would like to save money, but you also have debt that you want to pay down.  In a recent online poll conducted by the National Foundation for Credit Counseling (NFCC), 89 percent of more than 2,900 respondents said they value paying debt over saving.

This shouldn’t be a question of one or the other.  Paying down debt and saving are both important.  Paying down debt will improve your credit rating and being debt-free can have big psychological and financial benefits.  Saving money, while it lacks immediate gratification, can pay off big in the long run.  If you have an emergency, you’re less likely to take on debt to get through it.  Also, compound interest can make your savings add up to a lot more over time than your actual contributions. Thus, a little money not saved today can add up to a lot of lost money tomorrow.

If you have debt, make payments large enough to significantly reduce the principal.  A minimum payment on a credit card usually covers the interest and a tiny fraction of the principal.  Paying off a credit card with minimum monthly payments can take many years.  For example, say you have a card with a $1,000 balance and an interest rate of 18% APR and the minimum payment is 1% of the balance plus interest.  Paying it off would take 9 years and 5 months AND you would pay $923.12 in interest.  If you paid $100 every month, you would pay it off in 11 months and pay only $91.62 in interest.

The balance between paying debt and saving depends on your situation.  If you are unsure of what proper balance is, the credit counselors at our CCCS can help.

Call 888.656.2227 (CCCS) to speak with a credit counselor or get started now with an online credit counseling session.