When it makes sense to not pay off your credit card

By Marianne Curphey

Experts often advise that you pay off your credit card balance in full each month to prevent racking up interest. After all, sidestepping interest charges could save you hundreds or thousands in the long run, plus you avoid falling into a debt hole. However, sometimes it might make sense to pay the minimum and use the rest of your money elsewhere.

1.When you can earn more on your savings than you can on your debt
Generally speaking, you can't earn more interest on a savings account than what you pay on your borrowings.

However, if you have a credit card with a 0% interest period, it may be worth diverting your cash into an interest-bearing account, then using that savings to pay off the debt in full just before the 0% period ends.pay-minimum

But make sure you make your minimum payments on time every month. And don't let the sight of some surplus cash tempt you to spend it elsewhere -- the APR on the card will revert to a much higher rate at the end of the 0% period.

"In order for this strategy to work you do need to be very self-disciplined and organised so it may not be suitable for everyone," says Yvonne Goodwin, of Yvonne Goodwin Wealth Management Ltd.

Sarah Hennigan, certified financial planner at Money Clarity, warns that savings account interest rates are not particularly attractive, so it is crucial to pay the debt off before the end of the interest-free period.

"Otherwise any interest paid on the debt is likely to outweigh the whole years' worth of savings interest," she says.

2. When you have a debt with a much higher interest rate to pay off
Philip Pearson, independent financial adviser with P&P Invest, says the best plan for any debt repayment is to consider the loan that has the highest cost of interest.

"Loans that enjoy either an interest-free period or interest at a very low rate should always be left to last, as these cost the least to maintain," he says.

In other words, if you have one credit card with a low interest rate, or a 0% rate, and another debt with a much higher interest rate, it makes sense to tackle the higher interest debt first.

These might include store card debts (which generally have high APRs), unauthorised overdrafts (which can incur daily charges in addition to interest charges), or payday loans (which are notorious debt traps with sky-high interest rates).

3. If you have no emergency cash
Paying off debt but leaving yourself with no emergency fund is risky.

For example, if you suddenly need to replace a vital household appliance or if your car needs to be replaced at short notice, it's better to use emergency savings than a loan or credit card for those expenses. Last-minute borrowing often comes with higher interest rates.

In that way, Goodwin says an emergency cash reserve can help keep your credit record clean.

"Bear in mind that if you have a payday loan, you might not qualify for [an optimal] credit card," she says. This is because lenders generally think that if you have to resort to a payday loan, you aren't good at paying back your borrowing.

4. If you have a flexible or offset mortgage
Some flexible mortgages, including offset mortgages, will allow you to overpay your mortgage and then draw back the money if you need it -- without charge.

So you could pay the money you would have paid on your credit card into your offset mortgage account and save on the mortgage interest payments. Because mortgage rates are usually higher than savings rates, and debt costs more than you can make on savings, this approach may actually save you more money than putting the surplus cash into a savings account.

Hennigan says this approach can be useful if you have money in short-term savings.

"The interest rate payable on the mortgage is likely to be higher than the rate they would receive on a short-term savings account," she says.

"An offset mortgage provides a very flexible means of financing large expenditures such as a car purchase or home improvements, as the rate of interest is normally far better than the cost of a personal loan," adds Pearson. "The credit facility for an offset mortgage enables you to build up savings where interest is provided equal to the cost of borrowing."

See related: Avoid late payments -- factor in processing time, Borrowing up, interest down -- but for how long?

Published: 9 July 2014