This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Opening a CD may seem attractive right now, thanks to higher rates. But keep reading to learn why getting rid of credit card debt is a better move. [[{“value”:”
Image source: Getty Images
When you have a limited amount of money to go around, you have to make choices about what to do with it. Right now, you may be really interested in buying certificates of deposit (CDs) because you’ve probably heard that they are offering great rates. And in the right circumstances, opening a CD right now can be a good move.
However, the best choice for you depends on your other financial obligations. If you’re among the millions of people with credit card debt, you need to really weigh the pros and cons before moving forward with CDs.
Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards
Paying off credit card debt is usually the smarter financial move
As a general rule, if you have credit card debt, you should not be buying a CD. That’s because the interest rate on your credit card is going to be a lot higher than the yields a CD offers — even the most competitive CD out there.
The average credit card interest rate right now is 21.59%, according to the Federal Reserve. And while there are plenty of great CDs paying rates above 5.00%, it’s pretty easy to see that the return on investment (ROI) that comes from paying off debt at 21.59% is going to be higher than the ROI CDs would provide at 5.00%.
You always need to consider the opportunity cost when you decide what to do with your funds. Any money you tie up in a CD is money you can’t use to pay down your credit card balance. That’s an especially big issue here, since CDs have terms that typically range from three months to five years. It’s not as if you could just put your money in a CD until the credit card bill comes each month.
Does it ever make sense to buy a CD when you have credit card debt?
While the general rule is that you should absolutely focus on paying off your credit card debt first, there could be very limited exceptions.
Say, for example, you’re saving money for something very important and you’ll need the money within a few months. Maybe you’re paying for an important medical procedure, or waiting for a contractor to do some essential repairs on your house and you need that money to come out of your account in just a few months’ time.
It may not make sense to pay down your credit card balance with that cash, only to have to potentially charge the upcoming bill when the time comes. In that case, putting the money in a short-term CD could help you both earn interest and avoid touching the money or spending it on anything else. since there’s a penalty to getting money out of a CD early.
Or, let’s say you’re really close to paying off your cards and will be debt-free in a few months time — but you think interest rates are going to go down very soon and you want to lock in some money in a 5-year CD before it’s too late. If you absolutely know that you can open that CD now and still get those cards paid off in a few months, it may be worth it, in case rates do drop.
You can’t beat the ROI of paying off credit card debt
If you have credit card debt, the interest is so expensive that outside of investing enough to earn your full 401(k) match and making sure you have a small amount of emergency savings accessible in a savings account, paying off that debt should almost always be your first priority.
This may mean missing out on the chance to get in on CDs at today’s best rates. But there will be other opportunities to invest in the future. And the ROI of early credit card payoff absolutely can’t be beat.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
“}]] Read More
