Should I pay off my credit card or invest?
Last checked
Short answer
Clear the card first
It's costing you 21%, and no investment reliably beats that.
- Card cleared
- 16 months
- Interest paid
- $1,190
- Better off after 5 years
- +$3,600
- Card first, then invest
- Invest first, pay the minimum
| Year | Card first, then invest | Invest first, pay the minimum |
|---|---|---|
| 0 | -$8,000 | -$8,000 |
| 1 | -$1,916 | -$2,249 |
| 2 | $5,328 | $4,043 |
| 3 | $13,149 | $10,946 |
| 4 | $21,535 | $18,539 |
| 5 | $30,527 | $26,918 |
The numbers
This answer is worked out with these.
- Card balance
- $8,000
- Card interest (APR)
- 21%
- Minimum payment, per month
- $200
- Spare cash, per month
- $400
- Expected investment return
- 7%
- Time frame
- 60 months
Try your own numbers in the tools:
The trade-offs
Clear the card first
- A guaranteed 21% return: every dollar paid off stops costing you 21%.
- Debt-free in 16 months, with $1,190 of interest instead of $5,719.
- Nothing invested for the first 16 months, so keep a small cash buffer.
Invest first
- Your money starts compounding straight away.
- Still owing $1,719 after five years, having paid $5,719 in interest.
- Only comes out ahead if returns beat 21% a year, which is rare.
How we worked it out
You have $600 a month to put somewhere: the $200 card minimum plus $400 spare.
Card first puts all $600 on the card. At 21% APR that clears $8,000 in 16 months, with $1,190 of interest. From then on, the full $600 goes into investments growing at 7% a year.
Invest first pays the $200 minimum and invests the $400. Most of that minimum goes on interest, so after five years you've paid $5,719 in interest and still owe $1,719.
After 60 months, card first leaves you with a net worth of $30,527 against $26,918. That's about $3,600 more, simply by not paying 21% for longer than you have to.
Both paths assume interest is charged monthly and investments grow at 7% a year, compounded monthly. Real returns go up and down; card interest doesn't.
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