Should I Invest if I Have Credit Card Debt?

woman thinking whether to invest while looking outside window

While you can invest if you have credit card debt, it's often best to first pay off any credit card debt that's accruing interest. Paying off debt can be like getting a guaranteed return on your investment because you'll know exactly how much you can save.

Investing for the future is important, and your investments can grow over time. But low-risk investments rarely offer an annual return that's higher than what credit cards charge in interest.

When to Pay Off Credit Card Debt First

While paying off debt and investing are both important financial goals, paying off credit card debt should generally take priority over buying investments.

Credit card debt is a relatively expensive type of debt. The average interest rate for credit cards was 17.13% in the third quarter of 2021, according to the Federal Reserve. In comparison, the average rate for a 48-month auto loan was 5.14%, and the average rate for a 24-month personal loan was 9.39%.

If you carry a credit card balance, your credit card could be charging you interest on the balance and on any new purchases you make—and the interest often compounds daily. Paying off the debt allows you to stop this process and could effectively give you a return equal to your credit card's interest rate.

Historically, U.S. stock portfolios returned an average of about 10.3% per year, according to Vanguard, which is a much lower rate than the average credit card's interest rate. Investing in stocks also involves taking on risk. If you wanted to get an almost guaranteed return with much less risk, you'd likely have to put funds into a savings account or bond—and most have interest rates in the low single digits.

When It May Be OK to Invest With Credit Card Debt

There are a few exceptions when the math favors investing before paying off your credit card. However, you still want to make your minimum payments on time to avoid late payment fees, hurting your credit and potentially losing an intro offer and getting charged a penalty APR.

The Card Has a 0% Intro APR Offer

The first exception is when you have an introductory 0% annual percentage rate (APR) offer on one of your credit cards.

These intro offers may apply to your purchases, balance transfers or both types of balances. Because your credit card isn't accruing interest during the promotional period, there may be better ways to spend your money.

However, if you don't pay off the balance before the end of the intro period, it will start to accrue interest at the standard variable rate. And while you might be able to move the debt to a new credit card with another offer, there's often a balance transfer fee.

You could use Experian's credit card payoff calculator to figure out how much you need to pay each month to pay off the balance by the end of the promo period. You could try to pay at least that much—consider giving yourself a little wiggle room—and then invest any leftover money.

You Get a Match on Retirement Contributions

Another exception is when you invest with an employer-sponsored retirement account, such as a 401(k), and your employer offers a matching contribution.

For example, some companies might match your retirement account contributions dollar for dollar up to a certain percentage of your gross pay. You're essentially getting a 100% return on each of those dollars you invest, which is a much higher rate of return than you get from paying off a credit card balance.

You might want to focus on making contributions to earn your full employer match before putting extra money toward your credit card debt. Once the debt is paid off, you can increase your 401(k) contributions to reach your retirement goals.

The Bottom Line

There are many factors to consider regarding whether you should pay off debt or invest, including the type of debt, type of investment and personal preferences. There's often a general rule of thumb that it's best to focus on high-rate debt first, such as an interest rate over 6%. Considering credit cards often have double-digit interest rates, paying them off should generally take priority over investing. Once they are paid, you'll have extra money you could put toward investing—and you'll avoid racking up interest charges in the process.

You can check your credit score for free with Experian, and look into opportunities to consolidate or refinance your high-interest accounts with a lower-interest option. This process can make it easier to manage your finances, and help you become debt-free sooner.

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