Warren Buffett, CEO of Berkshire Hathaway, is an investing legend. He’s been one of the richest people in the world for decades, and billionaires and ordinary people alike follow his advice.
Yet the best advice he’s ever given has nothing to do with picking stocks or playing the market.
At the 2020 annual Berkshire Hathaway shareholder meeting, Buffett said that if you have credit card debt, you should pay it off before you even think about investing.
“You can’t go through life borrowing money at those rates and be better off,” said Buffett.
Here’s why investing in the stock market (or anything else) is a big mistake if you’re carrying credit card debt.
Why paying off credit card debt beats investing
Credit card debt is one of the biggest financial traps people fall into. Many credit cards charge interest rates of 20% or more. That means if you carry a balance, your debt is growing at a staggering rate.
Let’s compare that to investing. Historically, the stock market has returned about 10% per year before inflation. That’s an excellent return, but it doesn’t come close to the cost of credit card interest.
By the numbers: credit card payoff vs. investing
Let’s say you have $5,000 in credit card debt at a 20% APR. Over the course of five years, you’ll pay over $8,500 in interest if your minimum payments cover just your interest each month and your balance stays at $5,000. In other words, paying off your credit card balance in full would save you that amount.
If you instead invested that $5,000 in the stock market and earned 10% per year, you’d make about $3,000 in five years. Your brokerage account balance might look impressive, but you’d still lose thousands due to your credit card debt.
No investment is likely to beat the interest rate on credit card debt. Even Buffett said credit card payoff is “going to be way better than any investment idea I’ve got.”
Paying off your cards is like getting a guaranteed, risk-free return of 20% (or more) — which is an unbeatable deal.
How to pay off credit card debt
If you’re saddled with high-interest credit card debt, then paying it off will take sacrifice — namely, cutting expenses to the bone.
There is one tool that could make things much easier, however: a balance transfer credit card. It may sound strange to use a credit card to pay off a credit card, but it can actually work and save you a fortune — if you’re careful.
Here’s how it works: A balance transfer card lets you move existing debt from a high-interest credit card to a new one that offers a 0% APR for an introductory period — often 15 to 21 months. During that time, you’ll pay no interest, which means every cent you pay will go toward reducing your balance.
Balance transfer cards typically charge a fee of 3% to 5% of the amount transferred, so there is an upfront cost. However, you can save much more than that in interest.
Just do your best to:
- Avoid making purchases on your new card; this may only increase your debt
- Pay off the full balance before the 0% intro APR period ends; at that point, any outstanding balance will be subject to a high interest rate.
If you’re looking for a card that offers 0% intro APR for up to 21 months, then check out our list of the best balance transfer cards and apply today.
Don’t try to outdo Warren Buffett
Warren Buffett’s advice on credit cards is simple but powerful. No investment — stocks, real estate, or anything else — can reliably beat the interest rates on credit cards. Paying off your debt is the smartest, safest financial move you can make.
Once you’re debt free, then you can start investing with confidence, following Buffett’s approach to long-term, buy-and-hold investing.
