If you have outstanding balances on your credit cards, there are two reasons for paying down the debt before making any investments:
1. Interest rates. Credit cards charge around 12 percent, on average, and some cards charge even higher rates.
2. Tax treatment. The interest you pay on credit card debt is not tax-deductible.
When you pay down a balance on a credit card where the interest rate is 12 percent, you earn 12 percent, after-tax, with no risk. You’re reducing the interest you’d have to pay in the future. It is unlikely that you will find an investment that will pay you 12 percent, after-tax, risk-free.
Therefore, paying down high-rate credit card debt should be a financial priority in 2008, before you think about making investments. If paying down such debt is unlikely, think about refinancing the debt with a home equity line of credit, if you are a homeowner. With the latter type of debt, you’ll probably have a much lower interest rate and be able to deduct the interest payments.
