We all know it is smart to invest money, because it generally grows over time, which can bring us long-term profits. When we think of investments, stocks, mutual funds and bonds generally come to mind.
While paying off credit card debt may not seem like an investment, it can actually give you a return on your money if you are carrying a balance every month. Before investing in the stock market, consider paying off your credit card debt. It can save you a great deal of money, which could make it the smartest investment you make.
If you currently have a $2,000 balance on your credit card with a 15% APR, you will pay approximately $300 in interest in a year’s time. If you pay that instead of investing the $2,000 in the stock market, you have saved $300 for the year, which is a 15% return on your investment. Few stocks offer this sort of guaranteed return.
Paying off the debt on your credit card provides other benefits. Unlike stock market gains, you will not be taxed on these savings. Also, your credit score will increase since you are lowering your debt, which will help you qualify for lower interest rates in the future. Additionally, any stress you likely feel over your credit card debt will disappear when the debt is gone.
While the above information should underscore the importance of paying off your debt quickly, investing money to earn profit is still a good idea. It is best to do both, but keep this tip in mind when making future decisions.