Consolidate and pay off your credit cards before investing

Not all debt is created equal, but one thing is for sure, credit card debt is awful. It comes with a sky high interest rate, which means that a huge chunk of the repayments you make go to covering the interest on the debt.

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Sometimes it can be argued that investing is better than paying off debt. If you’ve got a mortgage that charges 3% in interest, and you think you can make 5%+ from an investment portfolio, it’s worth considering the pros and cons.

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This is not the case with high interest debt like credit cards. With interest rates well into the double digits, and sometimes over 30%, there is no realistic investment in the world that makes more financial sense than paying this off as soon as possible.

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If you have a number of different credit cards and personal loans, there is a straightforward process to follow for paying these off as soon as possible.

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• Consolidate your debts if it’s possible.
  
  You want to try and get the total amount at the lowest rate possible. Say you have three credit cards with £3,000 on each and an average interest rate of 18.99%.
  

If you can get approved for a £9,000 personal loan at 10%, you can then cut up the credit cards, use the loan to pay them off and focus on paying down just one loan while paying less interest.

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• Save up an emergency fund of 3 months living costs.
  
  Lots of people use credit cards as their ‘emergency fund’ and this is often how they end up in trouble in the first place.
  
  You should keep paying the minimum of your debts at this point, but saving up an emergency fund will make sure you don’t fall back into the habit of using credit for unexpected expenses that pop up.
  

Pay down the debt as fast as you can.
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Your aim should be to clear your debt as fast as you can once you’ve built up the emergency fund. The sooner you pay it off, the less interest you’ll pay overall.
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An added benefit of focusing all your spare cash into the debt is that it creates a monthly habit. Once your debt is cleared, all you need to do is re-direct the amount you were paying off into investments instead, and now you’ve got the beginning of a long term wealth creation machine.