Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Debts can be a significant burden both financially and emotionally. It may leave individuals unsure if they should tackle outstanding amounts before investing or use some of their current investments to pay off debt.
In short, this will depend on the interest they are being charged on the debt, and how much they expect to make from your investments.
If someone makes a significantly higher return from their investments than the interest they need to pay on your debt, they could be better off keeping some money invested.
But investors should remember, while the rate of interest on debt is set, the returns on investments are not guaranteed, so there is always a risk that your investments won’t outpace your debt.
Here we’ll discuss two types of debt, and if you could be better off paying off the amount before investing.
Facing credit card debt
If you have credit card debt, you are not alone. According to Experian, there is over £70 billion worth of credit card debt in the UK. While this can be notoriously tricky to get under control, it’s by no means impossible with careful budgeting and planning.
It could be difficult to invest in something that beats the interest rate of a credit card. The average interest rate on a credit card was 21.6% as of the end of July, according to the Bank of England. Over the past five years, the average interest rate has been 19.7%. In comparison, the standard global fund has averaged a return of 9.9% each year for the past five years*. This is just about half of what your credit card interest rate would be.
*Source: FE Fundinfo IA global sector average
Finding extra money to accelerate debt repayments
Here’s how putting extra cash towards credit card payments, versus investing, might work. Let’s say you build up £5,000 worth of credit card debt. Your card has the average interest rate of 19.7%, and you pay your minimum monthly amount of £50. After doing some budgeting, you’ve also found an extra £50 in your budget each month that you could either put towards additional card payments or invest. If you put that money towards paying down your debt, you could decrease your debt to £3,192 in five years, and pay it off completely in less than nine years.
But, if you just paid the minimum each month, and invested the other £50, your debt would continue to grow. In five years, it would turn into £8,237. And if your investment grew at 9.9% each year, not including fees, it would turn into a pot worth £3,861. Even if you used that investment to reduce your borrowings at that point, you’d still be in debt over £4,376.
How an extra £50 towards an in-debt credit card or an investment performs
| £100 towards credit card | £50 towards credit card, £50 towards investment | |
|---|---|---|
| Starting amount of debt | £5,000 | £5,000 |
| How debt changes with an interest rate of 19.7% and investment rate of 9.9% | £100 payments each month shrink debt, no investments building up | Debt grows to £8,237, while investment builds up to £3,861* |
| Total debt remaining after five years | £3,192 | £4,376 (if investments are used to pay off chunk of debt) |
*Assumes investments of £50 at the end of each month following the average IA global sector growth of 9.9% for five years. Source: AJ Bell
This doesn’t mean that you can’t get credit card debt under control. It just means that you are unlikely to invest your way out of it.
Instead, many people opt for a balance transfer credit card. If approved, these cards allow you to move your outstanding balance from other cards to a single place, and then often have a period of a year or two of 0% interest. During this time, you can pay off large chunks of the debt without the figure continuing to grow. Once this time is up, the interest rate is usually high.
However, these cards need to be approached with caution. They can have tricky terms and conditions, such as making the period of 0% interest invalid if you don’t transfer money soon enough, or if you’re late on a payment. They also usually come along with an upfront transfer fee that you’ll need to factor in. But if the terms and conditions of the card are understood and followed carefully, it can offer a much more manageable system to relieve credit card debt.
Because the interest rates on credit cards can be high, reducing the amount of debt as soon as possible generally results in the most savings. This is because the interest compounds, creating a snowball effect for debt you have.
Investing vs overpaying your mortgage
When it comes to investing versus overpaying your mortgage, there may be a bit more wiggle room for what could provide you with the most money in the long term. According to Rightmove, the average 2-year fixed term mortgage rate is 4.53%, while the average five-year fixed term mortgage is 4.56%.
You can use online mortgage calculators to get a better understanding of your future payments based on the outstanding balance, interest rate, and number of years you have left to pay. These will also typically give you an option to show how much you can overpay your mortgage without a penalty each year. Typically, this is somewhere between 10% and 20% of your total outstanding balance.
If you’re in a position where you’re able to overpay your mortgage, it may be worthwhile to consider investing instead. For example, let’s say you have a remaining mortgage balance of £250,000 at 4.5%, to be paid off over the next 20 years. If you had the funds, you could add on an extra £500 to your mortgage payment each month. Nationwide’s mortgage calculator estimates this could save you £46,735 in interest, and you could pay off your mortgage in just over 13 years instead of 20 years.
How mortgage overpayments could affect interest rate
| Mortgage rate of 4.5% | Without overpayments | With £500 monthly overpayments |
|---|---|---|
| Mortgage balance | £250,000 | £250,000 |
| Monthly payment amount | £1,582 | £2,082 |
| Total interest | £129,590 | £82,855 (saves £46,735) |
Source: Nationwide, based on 20-year mortgage
You could also choose to invest that £500 each month. If the returns followed what the average global sector fund generated in the past five years (9.9% a year), you could make near-£80,000 in returns before fees in that same 13-year time span. Using those figures, investing would leave you better off.
But there are other things to consider. There’s no guarantee that you’d have a near-10% return on your investments, and you could even lose money. You will also have investment charges to pay on top. The past five years have been particularly strong for global markets, so it’s possible that returns could be less going forward. If you made a return of 5% on your investment instead, your interest would stack up to about £31,500 , less than the savings from overpaying on your mortgage in our earlier example.
It’s worth running the figures based on your own situation to see what investing the money versus overpaying the mortgage could potentially mean.
Finding your comfort level
If you’re nervous about having big and/or expensive debts, you might consider repayments a priority. It is better to sleep soundly at night than to try and juggle investing and managing your borrowings. Hopefully, there is plenty of time to focus on investing once you have cleared any debts.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
