If you have a windfall or are luckily earning more money than you are spending, you will wonder how you can utilise this extra money. You can either transfer it to an emergency cushion or use it to repay credit card debt.

This is the most common question that people have in their mind about what to do with extra money, but there is no simple or straightaway answer to this question. For some, it makes sense to set it aside for a rainy day, while for others, it is a wise move to throw it at debt payments. However, some people may use the money for both purposes.

In this blog, you will come to know how clearing off the credit card bills can be better than saving or vice versa.

Start a budget that can be handy in finding the right way

The first thing to start with is budgeting. With the help of budgeting, you will have a clear idea of how much money you exactly have on top of what you need to meet your monthly expenses.

You cannot make any decision based on your conjecture. You will need more than a random figure in your mind to make the right decision. Chances are you dig your own grave. Stop guesswork. You should instead create a budget to know the exact amount of incomings and outgoings.

How will you benefit from paying off credit card bills?

Once you have created a budget, you have got an idea of how much money you are getting every month. If you cannot decide what you should do, the best thing is to pay yourself. Keeping it aside for a rainy day will prevent you from rushing to a direct lender to take out personal loan in Ireland when an emergency crops up.

Suppose you already have a good amount of money in an emergency cushion. In that case, you will likely be inclined to utilise this money for other purposes like debt settlement, including credit card bills. Here are the benefits you will get by using that money to settle your credit card bills:

  • You will save money on interest

The first benefit of paying off your credit card bills is that you will save money on interest. Credit cards are very expensive. They could be even more costly than loans for bad credit or those available with no guarantor.

The more time you take to settle the debt, the more interest will accrue. A credit card allows you to make the cost of the purchase within a grace period without any interest payments, but when you miss the due date, interest will accrue per day, and unfortunately, the cost of debt will quickly add up.

If you have extra money, you can utilise it to settle your credit card debt. You can understand it in another way. Suppose you have got to pay 29.99% on your credit card transaction. Clearing your dues means you have earned a 29.99% return on your investment.

One of the most significant benefits of settling credit card debts is that you can start investing a portion of the money you would have been paying toward the debt if you had not settled it early. Investments will help you get a return.

  • Peace of mind

Having too much debt can disturb your mental peace. Even if you have just credit card bills, accruing interest every day will likely make you restless. Getting rid of your credit card bills will help you get peace of mind. You will be able to concentrate on other essential tasks. It will help you sleep at night without any worries, which means you will be fit as a fiddle, lowering the chances of mounting medical bills.

  • It will help improve your credit score

A credit card bill can affect your credit rating badly if you do not pay them off on time. In fact, they will also make it more difficult for you to borrow money at affordable interest rates down the line. Having a credit card bill can increase your debt-to-income ratio, which should not be more than 30%. However, some lenders want it to be up to 25%, not more than that.

 A lender may turn you down even if you need money for an emergency expense if your debt-to-income ratio is high. It shows that you often rely on debt for most of your needs and therefore end up making a default.

The settlement of credit card bills will improve your debt-to-income ratio, and as a result, you will be able to borrow money at affordable interest rates down the line.

When should you transfer this money to your savings?

Here are the situations when it makes sense to transfer money to your savings:

  • You do not have an emergency corpus at all

Of course, if you do not have an emergency cushion, you would like to transfer extra money to it. When you have credit card debt, you will be unable to set aside the whole of your money for a rainy day, but it is still recommended to stash away some portion of your money.

A rule of thumb says you should have at least £1,000 in your emergency corpus. Before you focus on paying off credit card bills or other debts, you should try to prioritise your emergency savings.

  • No high interest debt

It is likely that your debt does not carry too much interest. If so, you should concentrate on setting aside money for an emergency cushion and paying off your credit card bills.

The final word

If you have got extra funds, you should pay off your credit card bills as you will be able to save money on interest. However, you can also prioritise your emergency cushion if you do not have too much debt or too expensive debt.

All it depends upon you to make the right decision by keeping your monthly income and its affordability in mind.