Most personal finance content treats this as a values question — "do you feel more comfortable debt-free?" It is actually a maths question first. If your debt costs 20% per year and your savings earn 5%, paying the debt is a guaranteed 20% return. No investment reliably beats that. The feelings come after the numbers.
The core principle
Compare the interest rate on debt to the return on savings
| Debt type | Typical rate | What to do |
|---|---|---|
| Credit cards | 20–30% APR | Pay off immediately — guaranteed return equal to the rate |
| Personal loans | 6–15% APR | Usually pay off; check for early repayment charges first |
| Mortgage | 4–6% APR (currently) | Depends — compare to savings rate; overpaying may not beat a high-yield account |
| Student loan (Plan 2/5) | RPI or RPI+3% | Usually ignore — treat as a graduate tax, not a debt to clear |
| 0% balance transfer | 0% (for a fixed period) | Save the money and pay off before 0% period ends |
High-interest debt
Credit cards at 20%+ always come first
There is no investment that reliably returns 20–30% per year. The stock market returns around 7–8% long-term before inflation — less than a third of a typical credit card rate. Every pound sitting in a savings account earning 5% while credit card debt compounds at 25% is costing you money.
Pay the minimum on all other debts to avoid penalty charges, then direct every spare pound at the highest-rate debt first. Once it is gone, move to the next highest. This is the avalanche method, and it is mathematically optimal.
On a £3,000 credit card balance at 24% APR, paying only the minimum takes over 25 years to clear and costs more in interest than the original debt. Even increasing the monthly payment from £60 to £150 cuts the repayment time to under 2 years and saves thousands. Minimum payments are designed by lenders to maximise interest income — not to help you.
Student loans
Usually ignore them — they behave like a graduate tax
UK student loans (Plan 2 and Plan 5) are not like normal debt. They are repaid at 9% of income above the repayment threshold, written off after 30–40 years, and never affect your credit score. Most graduates with average salaries will never fully repay their loan before it is written off.
Voluntarily overpaying a student loan that will be written off before it is cleared is, in most cases, giving money to the government for no benefit to you. The exception is high earners who are on track to fully repay the loan before write-off — for them, overpaying saves real interest. For most people, the money is better used elsewhere.
Mortgage
Overpaying vs saving — it depends on the rates
Mortgage overpayment is guaranteed to save you the mortgage interest rate. If your mortgage is at 5% and your best savings account pays 4.5%, overpaying is marginally better. If savings rates are above your mortgage rate — which has occasionally been true in recent years — keeping cash in savings and paying the minimum mortgage is mathematically better.
This calculation changes every time you remortgage. The answer depends on your current rate, current savings rates, and how much you can overpay without triggering an early repayment charge (most mortgages allow up to 10% overpayment per year without penalty).
The two exceptions
Always do these first, regardless of your debt
Build a minimum emergency fund before aggressively paying debt
If you have no emergency fund and you clear all your credit card debt, the first unexpected expense — car repair, boiler, job loss — goes straight back onto a credit card. Keep at least one month of essential expenses in easy-access savings even while paying down debt. Once high-interest debt is clear, build this to 3–6 months.
Non-negotiable foundation — prevents debt cyclingAlways capture your full employer pension match
If your employer matches pension contributions, get the full match before putting any extra money toward debt repayment. An employer match is an immediate 50–100% return — it beats paying off any debt, including credit cards. Contribute enough to get the full match, then put additional money toward high-interest debt.
Free money — the single best return available to you1. Minimum payments on all debts to avoid charges. 2. Employer pension match in full. 3. Minimum emergency fund (1 month expenses). 4. Clear high-interest debt (highest rate first). 5. Build emergency fund to 3–6 months. 6. Invest in ISA / increase pension contributions. 7. Consider mortgage overpayment vs investing depending on rates.
What's the right order for your specific situation?
The right answer depends on your exact debt rates, employer pension terms, and income. Ask Franky to work through the numbers with you.
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