Not all debt is equal. Some you can live with while you build savings. Some quietly eats your future so fast that every pound you invest is wasted. That second type is what this guide calls high‑interest debt.
High‑interest debt usually means anything above what you can reliably earn on savings/investments. In the UK now, that’s typically over 8–10% APR, and credit cards can be 20–35%+.
Here are two simple examples to show the difference.
Example 1 – 6% “low” interest vs investing
- Debt: £5,000 personal loan at 6% APR
- Minimum term: 5 years, fixed
- If you only pay the scheduled payments, total interest ≈ £800 over 5 years.
- If instead of overpaying this you can invest at 6–7%, the race between paying debt vs investing is roughly a tie (ignoring risk).
- Conclusion: 6% is uncomfortable but not “emergency”; you can split between overpayments and investing, once you have an emergency fund.
Example 2 – 25% credit card (typical “high interest”)
- Debt: £5,000 credit card at 25% APR
- Pay only minimum (say 3% of balance, reducing):
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- Time to clear: 10+ years
- Total interest: often £4,000–£6,000+ depending on minimum rules.
- Even if you’re an excellent investor and earn 7–8% per year, that is still far below the guaranteed 25% you’re losing on the card.
- Every £1 you use to clear that debt is effectively a risk‑free 25% “return”, which you can’t match elsewhere.
- Conclusion: anything in this range (20–30%+) should be treated as a priority emergency before investing.
Simple rule of thumb
- 20%+ APR (most credit cards, buy‑now‑pay‑later when interest kicks in):
- Clear as fast as possible, before investing.
- 10–20% APR (some store cards, overdrafts, sub‑prime loans):
- Strong priority to pay down; only minimal investing (e.g. workplace pension match).
- Below ~8–10% APR (good personal loans, student loans, some car finance):
- After an emergency fund, it can make sense to both overpay a bit and start long‑term investing, depending on your risk comfort.
If you tell me roughly what debts you have (type, balance, APR), a quick ranked list of which to attack first can be laid out.
