Financial expert Martin Lewis provides a helpful tip for anyone with credit card debt and savings. Lewis advises individuals to pay off their credit card debts using their savings in order to save money in the long run.
Lewis explains that if you have a £1,000 debt on a credit card at an interest rate of 22%, you would end up paying £220 in interest over the year. On the other hand, if you have £1,000 saved in a savings account earning 3% interest, you would only earn £30 in interest over the year. By paying off the debt with the savings, you would save £190 per year.
The Situation:
- In the UK, the cost of daily essentials like food and energy is high, thanks to inflation.
- Many people have turned to credit cards and loans to help make ends meet.
- At the same time, interest rates have increased. This means some homeowners are seeing their monthly mortgage repayments increase by a lot.
Martin’s Main Message: If you have credit card debt AND savings, you might be able to save some money. Here’s how:
The Maths Explained:
- Let’s say you owe £1,000 on your credit card, which has an interest rate of 22%. Over a year, that debt will cost you £220 in interest.
- On the other hand, if you have £1,000 in a savings account with an interest rate of 3%, you’ll earn £30 over a year.
- So, if you use your savings to clear your credit card debt, you’ll actually be £190 better off at the end of the year.
Why does this make sense? Even though it feels good to have money saved up, if you have a high-interest debt, you’re actually losing more money by not paying off that debt. It’s like having a hole in one pocket while trying to fill the other.
But, Are There Exceptions? Yes, Martin mentions two situations where you might NOT want to use savings to pay off debt:
- Low or No Interest: If your loan or credit card has very low or no interest, then it might make more sense to keep your savings, especially if the interest from your savings is higher than the debt interest.
- Penalty Fees: Some loans have penalties if you pay them off early. If that’s the case, it might be worth waiting until that penalty fee becomes smaller.
What About Having Savings for Emergencies? It’s always a good idea to have some savings set aside for unexpected events. Ideally, it’s recommended to have three to six months’ worth of expenses saved up. However, Martin makes a good point:
If you use your savings to clear high-interest debt, you can always borrow against your credit card in case of a significant emergency (like if something bad happens to your home or you’re struggling to buy essentials). And by “emergency”, he means real urgent needs, not luxuries like a new TV.
In Short: If you’re paying high interest on credit card debt, consider using your savings to clear that debt. You’ll end up saving more in the long run. However, always think about your personal circumstances and maybe seek advice before making big financial decisions.