Is Paying Off Debt Better Than Investing?

Jun 19 2026

Written by Dawn Allcot is a personal finance writer with more than two decades experience

Is Paying Off Debt Better Than Investing?

If you find yourself with some extra money, it may make financial sense to pay off high-interest debt before investing that money. As of June 2026, the average credit card interest rate was 23.79%. The S&P 500 has tracked to investment returns of 6.64% when adjusted for inflation. While the 6.64% isn't guaranteed, it would take a huge swing in returns to equal the 23.79% that you'd be paying on your credit card debt. Thus, if you pay off your credit card debt first, you will then have money available to invest.

Remember, any financial plan starts with a budget. Start by planning how much you need to spend each month and then build in a way to pay down debt and then invest.

Whether you should pay off your debt rather than investing in 2026 is a question that depends on your financial goals, how much debt you have, and what kind of debt it is. But the most important thing is to do something with any extra money not allocated to bills or other expenses.

Every Dollar Needs a Plan

Imagine you just received a windfall. Maybe you got a tax refund, an inheritance, or even won a sweepstakes or lottery. Now you’re wondering what you should do with the money.

If you adhere to a zero-based budget, every dollar needs a job. Even if you don’t have a strict budget, it’s a good idea to make a plan for windfalls and any extra cash, otherwise you might waste the money on little “extras” before you realize where it went.

The Dangers of High-Interest Debt

If you’re like most Americans, you probably have high-interest credit card debt that could be lowering your credit score and eating into your income every month. Keeping high credit card balances relative to your available credit reduces your credit score, since your debt-to-available credit ratio accounts for 30% of your credit score. And when you have a better credit score, you also pay lower car and home insurances rates, open the door to 0% financing offers and get better rates on credit cards. You might even qualify for cash back opportunities that help you travel.

Paying down debt can also help you save money on interest charges every month, eventually putting even more money to work for you.

American Credit Card Debt By The Numbers

As of the first quarter of 2025, Americans held $1.252 trillion in credit card debt, according to Federal Reserve data. That was down slightly from the last quarter of 2025, but $325 billion higher than the pre-pandemic record in 2019. Per household, this equates to $10,951 in credit card debt, per research from WalletHub.

And with average interest rates over 20%, this means each household is paying over $2000 per year in credit card interest payments. And it's why it might make financial sense to pay off your credit card balances at any and all costs.

Good Debt vs. Bad Debt

Before you make a decision to pay off your debt or invest your money, it’s important to look at the difference between what finance experts call “good debt” and “bad debt.”

Good debt is money borrowed at a low interest rate that is likely to earn you much more than you originally borrowed or deliver value to your life. A home mortgage is often considered good debt because interest rates are relatively low and it allows you to build equity in your home. Then, you can borrow against that equity at a low interest rate to fund projects, a business, or achieve other goals.

Another example: If you take out a low-interest loan at 5% and then invest the money to earn 10%, that debt is making you money.

Student loan debt might also be considered good debt because it’s an investment in your future that could lead to higher earning potential.

A debt consolidation loan or a 0% intro APR credit card may also be considered “good debt,” since it’s helping you pay off higher interest credit card debt.

Bad debt would include high-interest credit card debt that leaves you with nothing to show for it. For instance, if you charge an expensive vacation, you could pay interest on that purchase for years, with nothing but memories to show.

If you’re holding low interest debt, you’re better off paying down that debt over time. You don’t have to rush to pay it off. That’s one circumstance where it makes sense to invest your windfall than to pay off your debt.

Money In the Bank = Peace of Mind

Personal finance expert Suze Orman is a big advocate of building an emergency fund, even if it means taking more time to pay off your debt. If you don’t have emergency savings and your car needs repairs or a home appliance breaks down, you’ll end up putting that expense on a credit card. You’ll be back to using your credit cards again.

Credit card companies may also reduce your credit limit after you pay off a high balance, especially if you’ve missed payments in the past. Then you have no emergency cash savings and no buffer on your credit card for an emergency, either.

It’s smart to keep at least $1,000 in liquid cash, ideally in a high-yield savings account where you can earn 3% or more in interest. Ultimately, you want to build up three to six months of living expenses in a high-yield savings account.

Don’t Ignore Your Long-Term Financial Future

While it makes financial sense to pay off credit card debt and save on interest, you should also consistently save for retirement. Before paying off credit cards, make sure you’re investing into an IRA or a 401(k). If your employer offers matching funds in a 401(k) or similar defined contribution plan, try to max out your contributions for the year.

Pros and Cons

Everyone’s financial situation is different, but let’s look at the general pros and cons of paying down debt vs. investing your money.

Pros to Paying Off Debt

Increase your credit score
Free up credit cards for emergency spending
Save hundreds or thousands of dollars in interest per year
Peace of mind

Cons to Paying Off Debt (Instead of Investing)

Won’t have cash in the bank
Sacrificing high-yield earnings on investments
Risk of charging up credit cards again

Pros to Investing

Earn an average of 7% to 10%
Potential matching funds through an employer-sponsored 401(k)

Cons to Investing (Instead of Paying off Debt)

Continue paying high-interest credit card debt
Lower credit score
Risk of falling behind on bills / risk of bankruptcy

Bottom Line: Should You Pay Down Debt or Invest?

Before you decide to pay down debt or invest the money, ask yourself the following questions:

Have I started saving for retirement?
Do I have any money in emergency savings?
Am I paying more in interest than I’d earn with my investments?
If I pay off my credit card debt, will I be disciplined enough to use credit responsibly (or not at all) in the future?
Can I explore options like debt consolidation at a lower interest rate or a 0% APR credit card instead?

If you can transfer your credit card debt to a personal loan at 6.2%, which would be the lower end of what’s available right now, it might make sense to do that. Then you can invest your windfall with hopes of a 10% to 12% return in the long term. But remember, investment returns are not guaranteed.

Balancing your sense of financial security right now with your plans for the future should factor into your decision. But for many people with high-interest debt, paying it off as quickly as possible is the responsible choice.