Pay Off Debt or Save? | Ally (2024)

FAQs

Pay Off Debt or Save? | Ally? ›

Prioritizing debt repayment before saving is a prudent financial strategy that can lay the groundwork for long-term financial stability. This approach acknowledges the urgency of addressing existing debts, particularly high-interest ones, as they can be a substantial drain on your financial resources.

Ideally, you should pay off the debt with the largest interest rate first so that you pay the least amount of interest over time, according to Eldridge. The average annual percentage yield on a credit card is over 20%, according to Bankrate.

Increasing the down payment will not increase the amount of house for which a lender will qualify you. Using the funds to pay down debt may, because debt is one of the factors used to assess the adequacy of your income, and it also affects your credit score.

Pausing your retirement savings may make you feel like you're falling behind, but taking care of your debt first will only boost your progress later (just take another look at that earlier example if you're skeptical).

Over time, paying down debt has the potential to significantly improve your health and overall quality of life. No matter how small, any step toward becoming debt-free is a positive move in the right direction.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

Paying off old debts before they reach the statute of limitations or credit reporting deadline can positively influence your payment history, a significant factor in your FICO score. This move can boost your credit score and contribute to a healthier credit profile.

Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.

Bottom line. If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt.

Credit utilization makes up 30%, or one-third, of a credit score on the FICO model. So while the general rule of thumb is to have three to six months' worth of savings set aside before conquering debt, remember that interest will cost you in the meantime.

At what age should I be debt-free? ›

"Shark Tank" investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.

Key takeaways

If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.

However, the opportunity to save money won't mean much if you can't stay focused on your goal of repayment. If you're more motivated to see debts disappear quickly, you might opt for the snowball method. Whatever strategy you choose, the most important thing is to make repaying your debt a priority.

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.

Being debt-free is a financial milestone we often hear about people striving for. Without debt, you can focus on building more savings, investing those extra funds and just simply having more peace of mind about your finances. Paying off all your debt, however, doesn't always make sense.

Highlights: It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.

The Bottom Line. When deciding whether to save or borrow, start by asking yourself how quickly you need the item. If it's not an emergency, saving up is often the best option. If it is an emergency, review your borrowing options and choose the one that costs the least.