Should you invest or pay off credit card debt

Anyone can answer this question once framed appropriately. First, you need to understand the impact that stock market returns (both negative and positive) and interest rates (on your debt) have on your money. Once you do this, the information you really need comes largely from the variables involved with the debt. This includes things like the type of debt you have, the interest rate on what you owe, and the current balance.

Let’s dig into the numbers a little bit, though, to see how these positive and negative investment returns actually impact our money. For the purposes of this article, we’ll assume that the “stock market” is the S&P 500 Index, as it’s one of the most common indices used in the US.

All investment returns used here will be historical returns from the S&P 500.

Of course, not all 15-year periods will produce the same results. The point here is that our investments do have the ability to withstand even the most poorly performing markets if we invest for a longer periods of time. That said, there’s no guarantee that we will experience positive investment returns in any specific timeframe. Understanding the Impact of Paying Interest on Your Credit Card Debt

Combining the two examples above can provide us with a solution to our question. Put yourself in this position for a minute. Say the date is January 1, 1994 and you have $5,000 sitting in your bank account and another $5,000 in credit card debt. You’re wondering what you should do with that money. Do you invest it or pay down your credit card debt?

What if you took that $5,000 and paid off your debt in one lump sum payment on January 1, 1994? By doing so, you immediately guaranteed yourself a savings of $2,557, because there would be no need to pay interest on your loan. You also wouldn’t have to pay $125 each month for the next 5 years. What to Do Once You’ve Paid Off Your Credit Card Debt

The smart investor might set up an automatic contribution into an investment account of $125 per month. But you could just as easily split it in half and put $62.50 into the investment account and save the other $62.50 for a trip in a few years. In 33 months, you’d have $2,000 for a nice trip down to a tropical paradise – and you would be steadily adding to your investments at the same time.

Many companies offer very good deals in the first year to win new customers. These are often called “switching incentives.” For example, your mobile phone company could offer 50% off its normal rate for the first 12 months. Or your cable company could offer a big discount on the first year if you buy the bundle package. Credit card companies are no different. These companies want your debt, and are willing to give you a big discount in the first year to get you to transfer.

If you transfer your debt and use your card responsibly to pay off your balance before the intro period ends, then there is no trap associated with the 0% APR period. But, if you neglect making payments and end up with a balance post-intro period, you can easily fall into a trap of high debt — similar to the one you left when you transferred the balance. As a rule of thumb, use the intro 0% APR period to your advantage and pay off ALL your debt before it ends, otherwise you’ll start to accumulate high interest charges.

on Bank Of America’s secure websiteCardholders can benefit from an 0% Introductory APR on purchases for 18 billing cycles and an introductory $0 balance transfer fee for the first 60 days your account is open. After that, the fee for future balance transfers is either $10 or 3% of the amount of each transaction, whichever is greater. Once the intro period ends, there is a 15.24% – 25.24% Variable APR. You can benefit from a $0 annual fee and access to your free FICO® Score. When to consider a fee

While no-fee balance transfer cards are great, sometimes it may be worthwhile to consider a balance transfer card with a balance transfer fee. The fee will be a percentage — typically 3% or 5% — of the total amount you transfer, but cards that charge balance transfer fees often have longer intro periods. If you can’t afford the high monthly payments required to pay off your balance before the end of a 15-month intro period, a card offering a longer intro period — such as 18 months — can provide lower monthly payments while still allowing you to pay off your balance before the end of the intro period. Below, we provide an example that should help you decide when you should consider a fee.

By choosing the card offering an intro 0% for 18 months and a 3% transfer fee, you’ll only have to pay $364 a month to pay your debt and the balance transfer fee off in full during the intro period. That’s $60 less than the $424 monthly payment required by the card with an intro 0% for 15 months. Just beware that while you’re saving month to month, overall, you will end up paying about $190 more due to the balance transfer fee.