Should You Use Savings to Pay Off Debt?

You’ve worked hard to build up a savings pot. It’s sitting there in your bank account, a comforting safety net for the future. But at the same time, you have a nagging credit card balance or a personal loan, and the monthly interest payments feel like a constant drain.

This leads to one of the most common and stressful financial questions: should you use your hard-earned savings to pay off your debt?

The answer is a classic “it depends.” Wiping out your savings to clear a debt can be a brilliant financial move, but in some situations, it can leave you dangerously exposed. This is your practical, step-by-step guide to making the right decision for your financial future.

The Golden Rule: The Maths of Interest Rates

The core of this decision comes down to a simple mathematical principle, famously championed by money saving expert:

If the interest rate on your debt is higher than the interest rate you’re earning on your savings, you are losing money every day.

Let’s break it down:

Your Debt: A typical credit card charges around 21% APR.
Your Savings: A top easy-access savings account might pay you 5% AER.

In this scenario, for every £100 of debt you have, you’re paying £21 in interest over a year. For every £100 in your savings, you’re only earning £5. The debt is costing you far more than your savings are making you.

From a purely mathematical standpoint, paying off the high-interest debt with your lower-interest savings is a guaranteed win.

The Crucial Exception: Never, EVER Wipe Out Your Emergency Fund

Maths is important, but real life is messy. There is one massive exception to the golden rule: you must protect your emergency fund.

An emergency fund is a pot of cash, typically 3 to 6 months’ worth of essential living expenses, set aside for unexpected life events like losing your job, a boiler breakdown, or urgent car repairs.

Why is this non-negotiable?
If you use every penny of your savings to clear a £2,000 credit card bill and then your car breaks down a week later, what happens? You’ll have no choice but to go back into debt, often on an expensive credit card or overdraft, to cover the cost. You end up right back where you started, but this time without a safety net.

Action Step: Before you do anything, calculate your essential monthly outgoings (rent/mortgage, bills, food, transport). Multiply that by three. This is the absolute minimum you should keep in an easy-access savings account. Do not touch this money to pay off debts.

So, When Should You Use Savings to Pay Off Debt?

Here is your decision-making framework:

1. Pay Off “Toxic” High-Interest Debt

If you have savings over and above your emergency fund, and you have debts with high interest rates, you should absolutely use your excess savings to clear them.

Prime Candidates for Paying Off:
- Credit Cards (typically 20%+)
- Store Cards (often 25%+)
- Payday Loans (extremely high rates)
- Expensive Personal Loans

2. Think Twice About “Good” Low-Interest Debt

Not all debt is created equal. Some debt has a very low interest rate, and it may be smarter to keep your savings invested instead.

Candidates for Not Paying Off Early:
- Student Loans (Plan 2): The interest rate is relatively low, and repayments are tied to your income. Your money may be better off in a Lifetime ISA or a pension.
- 0% Interest Deals: If you have a 0% credit card, there’s no mathematical benefit to paying it off early with cash. Just make sure you pay it off before the 0% period ends.
- Mortgages: Mortgage rates are typically much lower than credit card rates.

The Strategy in Action: A Step-by-Step Plan

Calculate Your Emergency Fund: Figure out your 3-6 month safety net number.
Ring-fence That Money: Mentally (or physically, in a separate account) label this as your untouchable emergency fund.
List All Your Debts: Write down every debt you have, along with its interest rate.
Attack the Most Expensive Debt First: Use any savings you have above your emergency fund to pay off the debt with the highest interest rate. This is known as the debt avalanche method.

Making the decision to use your savings can be tough, but by following this logical process, you can ensure you’re making a powerful and positive move for your long-term financial health.

Your Financial Journey, Your Decision

This is a big financial decision, and every situation is unique. Sharing our thought processes can help everyone learn.

Are you currently facing this dilemma? What are your biggest concerns about using your savings to clear debt? Share your thoughts or questions in the comments below, and let’s support each other!