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Save or Pay Off Debt? Here’s What to Consider

If you feel like debt is weighing you down, but you want to build up some savings, too, you’re not alone. Our quarterly Consumer Pulse shows that, despite challenges to household budgets, some people have been able save more in their emergency funds (savings they’re stashing away for a rainy day) in the previous three months. But at the same time, others had to dip into savings to pay their bills. Because everyone’s finances are different, when it comes to managing your savings and debt, there’s no universal strategy that works best for everyone.

If you have debt, and are motivated to build a savings account at the same time, a balanced approach can work. In other words, you don’t need to decide whether to save or pay off debt. Below are things to keep in mind as you make your plan.

Know where you stand

Start by identifying exactly how much debt you have. If you’re having trouble keeping track of all your credit accounts, getting your credit report may be an easy way to see them all at once. In your credit report, you’ll see information like the terms, payment history and balance for each account. Lenders tend to provide account updates monthly so it may take some time for the information to be updated on your report.

For help understanding each section, we’ve created an interactive tool on how to read your credit report. Your credit report is good for seeing an overview of your credit history, but if you want to track day-to-day changes, you should check with your bank or lender accounts individually.

Determine which debt to tackle first

Based on your credit report, create a list of all your debt—the total amount you owe as well as the interest rate you’re paying.

The interest rate for your savings account will likely be lower than those of your credit accounts, whether it’s a personal loan, credit card or other type of loan. So, the money in your savings account will earn less than your debt will cost you. When it comes to what’s best from a dollars and cents perspective, using extra cash to pay down debt is smart.

However, the approach you take will depend on the type of debt you have. That’s why it’s important to approach your strategy based on your own situation.

Credit card debt considerations

Credit cards tend to have higher interest rates than other types of credit, such as a mortgage. As a result, you will likely want to prioritize paying this debt off first. It may seem more affordable to make a minimum payment rather than the full balance. However, because of the high interest rate, it can take a while to pay off the balance in its entirety and be expensive in the long-term.

Beyond saving you money in interest, there can be an extra benefit to paying down credit card debt. That’s because it can improve your credit utilization—how much of your credit limit you’re using—which may have a positive impact on your credit score. Given these factors, credit cards are usually the best place to start when paying off debt.

Installment loan debt considerations

Installment loans—like mortgages, personal loans, auto loans and student loans—are a type of debt in which you pay a fixed amount for a set period of time. These usually have lower interest rates than credit cards. If your installment loan payments are manageable and you have little or no savings, it may be worth creating an emergency fund before aggressively paying these down beyond your regular monthly payments.

One strategy to consider is refinancing your mortgage or other installment loans to a lower interest rate. It may help make payments more manageable. When you refinance, you’re essentially creating a new loan, which could result in a hard inquiry on your credit report. This can have a temporary impact on your credit score.

Understand the benefits of saving

While it’s smart to use most of your extra cash for paying down high interest debt, you can reserve some to slowly build up your savings account. Putting money aside may prevent you from having to take on additional debt to cover an unexpected expense in the future.

Your emergency savings account should be separate from your everyday checking account. This makes it much easier to keep track of your savings and acts as a minor barrier, so it’s less tempting to dip into it for impulse purchases.

To build your emergency savings, set a modest, achievable goal you feel comfortable with. It could be $100, $1,000 or anything between and beyond. Determine when you want to meet this goal, divide your goal amount by the number of months and set up automatic transfers to deposit it regularly.

When the goal is met, you can ramp up your debt payments even more. As your debt disappears, you can focus more on both short and long-term savings. Even if it’s a small amount, saving consistently and automatically is a great habit to establish and will pay off long term.

Stick with your plan

As you determine whether to save or pay off debt—or do a little of both—know that you’re on a journey. Especially in the early stages, be sure to set achievable goals. Seeing your debt decrease and your net worth increase is a great motivator for continued success.

Be patient with yourself as you get back on track with contributing to your savings while paying down debt. You’ll find that over time, by committing to your plan you’ll reach your financial goals.

If the unexpected does happen, learn more about getting your credit back on track after a financial setback. Start with six tips on how to rebuild your credit.

Disclaimer: The information posted to this blog was accurate at the time it was initially published. We do not guarantee the accuracy or completeness of the information provided. The information contained in the TransUnion blog is provided for educational purposes only and does not constitute legal or financial advice. You should consult your own attorney or financial adviser regarding your particular situation. For complete details of any product mentioned, visit This site is governed by the TransUnion Interactive privacy policy located here.

What You Need to Know:

The credit scores provided are based on the VantageScore® 3.0 model.  Lenders use a variety of credit scores and are likely to use a credit score different from VantageScore® 3.0 to assess your creditworthiness.

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