Should I pay off my credit card or save?

One of the most common financial dilemmas Americans face is deciding whether to prioritize saving money or paying off debt. The best approach often depends on your unique financial situation — but in most cases, striking a balance between both is key to long-term financial health.

Paying off high-interest debt quickly can significantly reduce the amount you pay in interest over time. It also frees up room in your monthly budget, allowing you to invest or save more for future goals.

At the same time, building an emergency fund is equally important. Having savings on hand helps you avoid going further into debt when unexpected expenses arise. In fact, according to Bankrate’s 2024 Emergency Savings Report, 36% of U.S. adults are prioritizing both debt repayment and emergency savings simultaneously.

Key Takeaways: Balancing Debt Repayment and Saving Money

1. Finding the right balance between saving and paying off debt is essential. Many Americans wonder whether they should prioritize building savings or focusing on debt reduction. In reality, doing both — strategically — often leads to the best financial outcomes.

1. Saving money helps you prepare for unexpected expenses. By growing your emergency fund, you can cover surprise costs like medical bills or car repairs without relying on credit cards or loans — helping you avoid further debt.

1. Paying off debt saves you money in the long run. A solid debt repayment strategy reduces the total interest you pay over time and frees up income for future goals, like buying a home, investing, or growing your savings.

Should You Save Money or Pay Off Debt First? Here’s How to Decide

There’s no one-size-fits-all answer to the “save vs. pay down debt” question. However, certain financial situations may make one strategy more beneficial than the other.

Want to know which option might be right for you? Keep reading to explore scenarios where saving money or paying off debt should take the lead.

Bankrate Survey Reveals Alarming Trends in Credit Card Debt and Emergency Savings

According to Bankrate’s 2024 Emergency Savings Report, many Americans are facing serious financial pressure when it comes to saving and managing debt.

Only 44% of U.S. adults say they would be able to cover an unexpected expense of $1,000 or more using their savings. Even more concerning, 36% admit that their credit card debt exceeds the amount they have set aside in emergency savings.

When asked about financial priorities, 25% of survey participants said they are currently focused on paying down debt, while 28% are prioritizing building emergency savings. Meanwhile, 36% are attempting to do both — highlighting the need for a balanced financial strategy.

Among those who do have emergency savings, 59% feel uneasy about the amount they've saved, showing a widespread lack of financial security. Additionally, 89% of respondents believe that having at least three months’ worth of expenses saved would help them feel more financially stable.

These findings emphasize the importance of maintaining healthy emergency savings while also working to reduce high-interest debt, such as credit card balances. Striking the right balance can help individuals avoid financial setbacks and build long-term stability.

When Should You Prioritize Saving Money Over Paying Off Debt?

Knowing when to focus on saving versus paying down debt can be tricky. But in certain situations, prioritizing your savings goals can actually offer more long-term benefits — especially when it comes to building financial stability.

1. You Have Low-Interest Debt

If your debt carries a very low interest rate, it might be wiser to prioritize saving money instead of rushing to pay off those balances. For example, Bankrate’s “Chasing Rewards in Debt” Survey found that 44% of American credit cardholders carry a balance month-to-month. But if your debt has a low interest rate, it may cost less over time — making it more beneficial to build your savings first.

According to Melissa Joy, a certified financial planner and founder of Pearl Planning in Dexter, Michigan, focusing on emergency savings or future investments can be smarter when your debt doesn’t carry a heavy interest burden.

2. You Have Access to a 401(k) Employer Match

A major reason many Americans feel financially insecure is lack of retirement savings. In fact, 41% of U.S. adults say they’re not financially comfortable due to insufficient retirement funds, based on Bankrate’s Financial Freedom Survey.

If your employer offers a 401(k) with a matching contribution, make sure you’re contributing at least enough to get the full match. This is essentially free money for your future, and missing out on it could mean leaving thousands of dollars on the table over time.

Bottom Line

If you have low-interest debt or access to valuable employer retirement benefits, shifting your focus toward saving money — especially in an emergency fund or retirement account — could offer a more solid financial foundation. Always assess your personal financial situation and long-term goals before deciding whether to pay down debt or build your savings first.

Don’t Delay Saving for Retirement — Even If You Have Debt

It’s important to remember that waiting to save for retirement until you’re completely debt-free could end up costing you valuable time and money. Thanks to the power of compound interest, even small contributions made early to your 401(k) or IRA can grow substantially over time. The longer your money stays invested, the more potential it has to multiply. That's why it’s often wise to start saving for retirement now, even while gradually paying off your debt.

Why Emergency Savings Should Come Before Paying Off Debt

If you don’t have any emergency savings, building that fund should be your top priority—even ahead of aggressively paying down debt. According to Bankrate’s Emergency Savings Report, 59% of Americans feel uneasy about how much they have saved for unexpected expenses. Without an emergency fund in place, even a minor surprise expense—like a car repair or medical bill—can force you to rely on high-interest credit cards, only increasing your debt burden.

Financial expert Melissa Joy, CFP and founder of Pearl Planning, warns:

“Focusing only on debt repayment without a savings cushion can backfire. Life throws curveballs, and without savings, you’ll likely have to borrow again—keeping you stuck in a cycle of revolving debt.”

To break free from the debt trap and avoid setbacks, it's crucial to set aside a safety net for financial emergencies while slowly reducing what you owe.

How Much Should You Save in Your Emergency Fund?

Financial experts recommend saving enough to cover 3 to 6 months’ worth of living expenses in an emergency fund, ideally stored in a high-yield savings account. Some professionals even suggest building up to 12 months of expenses, especially during uncertain economic times.

However, if that sounds overwhelming, remember—it’s okay to start small. Aaron Graham, a tax planner at Holistiplan, advises beginning with a more attainable goal: “Aim to save at least one month’s worth of expenses first. Emergencies are not a matter of if, but when—you need to plan for them.”

Stay Ahead by Living Within Your Means

To avoid falling into a cycle of debt, it’s crucial to live within your means, especially during times of economic uncertainty. Developing good financial habits—such as budgeting, building an emergency fund, and avoiding unnecessary expenses—can help you navigate financial challenges without relying on high-interest credit.

Smart planning today can help you stay debt-free tomorrow.

Dealing With Reduced Income: What You Need to Know

While economists estimate the likelihood of a U.S. recession in the coming year at around 33%, gradual declines in job growth are still expected, according to Bankrate’s Economic Indicator Survey. This slowdown in the labor market could lead to fewer opportunities and reduced income for many Americans.

Another common cause of a drop in earnings is switching jobs—especially if your new role comes with a lower salary than your previous position. Whether due to a career change, relocation, or simply accepting a job with better work-life balance, reduced income can pose budgeting challenges.

How to Manage Reduced Income Wisely

1. Review your budget and prioritize essential expenses.
2. Focus on cutting discretionary spending where possible.
3. Consider building a side income stream or freelance gig to supplement earnings.
4. Tap into emergency savings only when necessary, and create a plan to replenish them.

By making intentional adjustments, you can stay financially stable even with a smaller paycheck. Planning ahead for potential income changes is a smart part of any personal finance strategy.

Dealing With Continued High Prices: Inflation and Budgeting in 2025

Although inflation has cooled compared to previous years, elevated prices continue to impact household budgets across the U.S. As of September 2024, the Consumer Price Index (CPI) reported a 2.4% year-over-year increase, down from 3.7% in September 2023. While the Federal Reserve’s efforts to slow inflation have shown some progress, the cost of essential goods like housing, groceries, and auto insurance remains stubbornly high.

For many Americans, this means continuing to feel the pinch at the checkout line and when making large purchases. Additionally, higher borrowing costs due to interest rate hikes have made loans and credit more expensive.

How to Navigate High Prices in 2025

1. Reevaluate your spending habits and cut back on non-essentials.
2. Look for deals, discounts, and loyalty programs to stretch your dollars.
3. Focus on saving rather than borrowing whenever possible.

The good news? Interest rates on high-yield savings accounts are still near historic highs, giving you the opportunity to grow your emergency fund or savings faster than in previous years. Be sure to compare rates and choose an FDIC-insured savings account that offers a competitive return.

How to Adjust to Income Cuts and Rising Living Costs

Being proactive with your finances is key to maintaining stability when faced with income reductions or increased living expenses. A well-funded emergency savings account allows you to handle these challenges without turning to additional debt—a crucial factor considering that 47% of people report debt as a major cause of financial stress, according to Bankrate’s Money and Mental Health Survey.

If you lose your job, having savings means you won’t feel pressured to accept the first available position. Similarly, if you switch to a job with a lower salary, a financial cushion helps ease the transition.

To better prepare for potential income loss, start by cutting monthly expenses today. One effective strategy is to contact your service providers and lenders to negotiate lower bills.

Tony Wahl, a credit and loan expert at Credit Sesame, advises:

“While some bills like water and electricity might be fixed, many subscription services—such as phone, cable, and internet—can often be negotiated. Lowering these payments can free up cash, allowing you to increase your savings and better manage your budget.”

Taking these proactive steps not only helps protect your finances but also gives you peace of mind during uncertain economic times.

When to Prioritize Debt Repayment: A Smart Financial Strategy

If you’re dealing with high-interest consumer debt, prioritizing debt repayment can be a powerful way to regain control over your finances. Reducing your principal balance and the interest you owe each month frees up more cash in your budget, allowing you to save or cover other important expenses.

To start tackling your debt effectively, follow these four essential steps:

1. Calculate Your Disposable Income: Determine what money remains after covering housing, utilities, transportation, food, and other necessary expenses.
2. Track All Regular Expenses: List every monthly and occasional expense. Identify areas where you can cut back or eliminate costs.
3. Create a Realistic Budget: Use your income and expense data to build a budget, including specific line items for monthly debt payments.
4. Set Financial Goals: Define your priorities—whether saving for a home down payment, a vacation, or building an emergency fund—and allocate funds in your budget accordingly.

Tara Alderete, Director of Enterprise Learning at Money Management International, highlights that while debt reduction is generally a smart priority, there are exceptions.

“If your emergency fund is already well-stocked, focusing on paying off debt quickly often makes sense,” Alderete explains. “But if you’re only making minimum payments on high-interest debts, it’s crucial to prioritize paying off those costly balances, as they can drain your finances and hinder your long-term goals.”

The key, Alderete emphasizes, is to concentrate on priority expenses first in your budget. This approach helps free up money to accelerate debt repayment while still contributing to an emergency savings fund.

When to Prioritize Paying Off Debt First

Knowing when to pay off debt first can make a big difference in your financial health. Consider focusing on debt repayment if:

1. Your debts carry high interest rates that can quickly accumulate and increase your overall balance.
2. Your debt situation is causing you stress or anxiety, affecting your mental well-being.
3. A significant portion of your monthly income is going toward debt payments, restricting your financial flexibility and ability to save or cover other expenses.

Prioritizing debt payoff in these situations can help you regain control of your finances faster and reduce unnecessary interest costs.

How to Decide Which Debt to Pay Off First: A Guide with Debt Management Tools

Using a debt management calculator can help you figure out how much money to allocate each month to effectively pay down your debt.

Which Debt Should I Pay Off First?

To protect your credit score, always make at least the minimum monthly payment on all your credit cards and loans. Beyond that, prioritize paying off debts based on key factors such as:

1. Interest rates
2. Overdue payments
3. Outstanding balances

Here are popular strategies to manage multiple debts at once:

1. Avalanche Method

Focus on paying off the debt with the highest interest rate first while making minimum payments on the rest. This approach minimizes the total interest you pay and helps you get out of debt faster.

2. Snowball Method

Start by paying off the smallest debts first, regardless of interest rates. Eliminating smaller balances quickly can boost your motivation and free up money to tackle bigger debts.

3. Prioritize Debts Impacting Your Credit Score

Credit utilization—the ratio of your credit card balances to credit limits—greatly affects your credit score. Experts recommend keeping utilization below 30%. Paying down cards with high balances relative to their limits can improve your credit score while reducing debt.

4. Debt Consolidation

Consider consolidating multiple debts into one by using a balance transfer credit card or personal loan, especially if you qualify for a 0% introductory APR. This simplifies payments and can save on interest while you pay down your balance.

Balancing Debt Repayment and Savings

When managing your finances, choose a debt payoff plan that fits your situation—whether it’s the avalanche, snowball, or credit score-focused method. Debt consolidation is also worth exploring if you carry multiple high-interest debts.

At the same time, consistently building your savings is crucial. Having an emergency fund prevents unexpected expenses from pushing you deeper into debt.

Financial experts like Greg McBride, CFA, from Bankrate, advise:

“Debt repayment and savings are not mutually exclusive. Automate savings through payroll deductions, then use take-home pay to aggressively pay down debt. A savings buffer protects you from costly debt if emergencies arise, and starting to save early helps with long-term financial goals.”

Final Thoughts: Finding Financial Stability

Striking the right balance between paying off debt and saving money is essential for long-term financial health. Develop a budget, set clear goals, and adjust your plan as your financial situation evolves. It’s never too late to start taking control—consistent action leads to financial freedom.

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