Credit card debt in America is at an all-time high, hitting $2.21 trillion in the second quarter of 2025, according to the Federal Reserve. By July, the average American owed $6,492 on credit cards. (1)
And that’s just the average. Many struggle with much higher balances. Take Alice, for example.
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She owes $25,000 across her credit cards, and is struggling to pay her balance down.
Since Alice is in a deep hole, she wants to pay it off as soon as she can. However, she’s confused by some recent advice from her friends: They argue that you should have a fully funded emergency fund before paying extra to creditors.
What should she do? Should she put as much of her spare cash as possible into a bank account to be ready for a rainy day?
Or should Alice listen to her gut and repay her cards early?
Here are some things someone struggling under the weight of consumer debt should consider.
Pros and cons of paying off credit card debt first
Alice’s instinct is to pay off her credit cards first and there are some big advantages to that.
For one thing, credit cards have a very high interest rate — averaging 21.16% in May, according to the Federal Reserve. So she’s paying a fortune in interest. The sooner she pays off that debt, the more money she’ll have. (2)
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
In fact, the interest rate on her credit card debt is far above the ROI she’ll get from building an emergency fund in a high-yield savings account.
So she’d effectively lose a lot of money by sticking thousands in savings while allowing her credit card balance to remain so high.
In contrast, if Alice pays off her cards ASAP, she’ll free up a lot of cash for accomplishing other financial goals. This will help set her up for a more secure future.
Plus, by paying down the balance on her cards, she’ll improve her credit utilization ratio (your outstanding debt divided by your total available credit), an important factor in the credit-scoring formula.
With an improved credit score and debt-to-income ratio, Alice can get approved more easily — and at a better rate — for things like a car loan or mortgage. (3)
However, there is a downside to focusing solely on debt. Alice won’t be financially prepared for emergencies, like a layoff, and would probably have to go back into credit card debt to cover one.
So that is a risk she’ll have to think about and weigh carefully.
But on the positive side, if she has to charge an unexpected expense to her credit cards, she’d just be erasing a little of her progress — and she’d have saved on interest in the meantime.
Still, it can be demoralizing to keep paying off debt and charging your cards back up again when surprise expenses crop up.
Alice should carefully consider whether an emergency is likely to not only derail her progress in tackling her debt, but also her resolve to pay it off.
Pros and cons of creating an emergency fund first
Alice could also opt to pay the minimum on her credit cards until she has a fully funded emergency fund. Depending on her circumstances, this would mean saving three to six months of living expenses.
The upside is she’d be ready for a rainy day and won’t have to cover emergency costs with her credit cards. That may be incredibly motivating for her and help her avoid the debt cycle.
Still, the downsides are that she’ll lose money by earning only 3% or 4% interest on her savings while paying upwards of 20% interest on her cards. That could see her pouring money down the drain.
For example, if Alice has $2,000 to devote to her credit card debt each month, it would take just one year and three months to pay it off. She would spend $3,489.75 on interest.
Let’s say she socks away $1,500 a month into an emergency savings instead over that same period — and just pays a minimum $500 a month on her credit card debt. She’d have an impressive $23,662.74 in her emergency fund, but earn only $1,162.74 in interest (at 4% on her high-yield savings).
And disturbingly, if she’s only paying $500 a month on her credit card debt, it would take a whopping 10 years and three months to pay it off. (4)
Which option is right for you?
Ultimately, anyone who’s choosing between debt payments and emergency savings has to make the choice that’s right for them.
If you think you’d be discouraged and lose focus if you had to go back into debt because of an emergency, then prioritizing your emergency fund may make good sense.
But if you want to get the most return on investment for your hard-earned dollars, focus on paying off your credit card debt.
There’s also a third option: You can save a $1,000 mini emergency fund, as finance expert Dave Ramsey suggests. He advises saving until you have $1,000 put away for unexpected expenses, then immediately switching over to paying off debt. (5)
That way, you can cover minor emergencies without reaching for the cards again, but you get started on your debt sooner and save on interest.
Alice should also think about other changes she can make to pay off her debt as soon as possible. That means:
- Identifying areas where she’s overspending and making a strict budget that prioritizes essentials.
- Paying extra on her debt every month, and automating payments to ensure they’re made before she spends the money.
- Putting any windfalls towards her debt to move the balance faster.
- Crunching the numbers to decide whether to pay the smallest balances first, known as the Snowball Method (to stay motivated with quick wins) or pay down the biggest credit-card debt first, known as the Avalanche Method (to save the most on interest)
Once Alice has paid off her cards, she’ll need to get serious about her emergency fund so she’ll be in better financial shape and won’t fall back into the cycle of debt.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Federal Reserve (1, 2) Equifax; (3); Investor.gov (4); Ramsey Solutions (5)
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