Last year, the average U.S. consumer carried $6,576 in credit card debt. Earlier this month, the average credit interest rate stood at 14.5 percent.

With so many people struggling with large balances and high interest rates, Money Talks News founder Stacy Johnson gets asked this question more than most: Do I pay off my debts or save for retirement? Check out his answer in the video below, then read on for details about what you should do

Click here to watch Save for Retirement or Pay Down Debt? on MoneyTalksNews.com

When youre trying to reach your financial goals, you have to decide what investment will give you the highest return. Compared to the rate of return on a typical savings account, CD, or stock investment, youll have a higher rate of return by paying off your credit cards first.

Say you have $7,000 in credit card debt and a 15 percent interest rate. If you pay the minimum payment of $157.50 (2.25 percent) on your credit card, it will take 25 years to pay it off. During that time, youll pay $8,229.16 in interest.

On the other hand, if you paid $300 a month toward your credit card balance, youd have the debt paid off in 28 months and youd only pay $1,328.13 in interest.

As Stacy said in the video, if youre paying 15 percent on a credit card, paying it off is like earning 15 percent tax-free and risk-free. Thats hard to beat.

But theres an exception to this rule: a 401(k) or other type of retirement plan that offers a company match. In these plans, your employer matches your contributions up to a certain amount, typically 50 percent of whatever you contribute, capped at 6 percent of your annual salary. So if you earn $50,000 annually and contribute $3,000 (6 percent) to your retirement plan, the company will contribute $1,500.

Thats free money: something hard to come by!

If your company matches any of your 401(k) contributions, make sure youre contributing enough to get every free penny being offered by your plan. After that, put any extra income you have left into paying off your debt. Once your debt is wiped out, then you can start contributing more to your 401(k) or looking into other investment options.

See the original post here:
Save for Retirement or Pay Down Credit Card Debt?