For most people the answer is both, in a set order: keep up with priority bills and minimum payments, build a small emergency fund, take any employer pension match, then put every spare pound towards your most expensive debt before saving more. The reason is simple maths. Debt on a credit card or overdraft usually costs far more in interest than savings earn, so clearing it is a guaranteed return.
The small emergency fund comes first because without it, the next broken boiler or car repair goes straight back on a card. This guide sets out the seven steps, explains the exceptions and shows how to compare rates. If you are starting from zero savings, our guide to saving when you have debt covers the first few weeks.
Step 1: priority bills and debts
Some debts carry far more serious consequences than others, so they always come first, before saving or overpaying anything else.
- Rent or mortgage arrears (risk of losing your home)
- Council tax arrears (the council can ask for the full year and use enforcement agents)
- Gas and electricity arrears (risk of a prepayment meter)
- Court fines, child maintenance and Income Tax or VAT owed to HMRC
- TV licence (not having one when you need it is a criminal offence)
Step 2: minimum payments on everything else
Pay at least the minimum on every credit card, loan, overdraft and buy now pay later plan. Missed payments add fees, can raise your interest rate and damage your credit file for six years. If you cannot cover the minimums, stop here and get free advice from StepChange, National Debtline or Citizens Advice. In England and Wales, a debt adviser can also apply for Breathing Space, which pauses most interest, charges and enforcement for 60 days.
Step 3: a starter emergency fund
Before attacking debt, save a small buffer of around £500 to £1,000 in an easy-access account, or one month of essential costs if you can. This is not about earning interest. It stops you borrowing again when something goes wrong, which is the main reason debt repayment plans fail. Our emergency fund calculator helps you set a figure.
Step 4: take the employer pension match
If your employer matches extra pension contributions, paying enough to get the full match is usually worth doing even while you have debt. The employer money plus tax relief is an instant return that beats almost any interest rate. Do not opt out of auto-enrolment to repay debt unless you are in serious difficulty and have taken advice.
Step 5: clear expensive debt
Now put every spare pound towards your most expensive debt, while paying minimums on the rest. Compare interest rates: if your debt costs more than your savings earn after tax, repaying it wins.
| On £2,000 | Example rate | Over one year |
|---|---|---|
| Credit card debt | 24.9% APR | You pay about £500 in interest |
| Easy-access savings | 4% AER | You earn about £80 |
| Difference | About £420 in your favour by repaying |
Paying the highest rate first (the avalanche method) saves the most interest; clearing the smallest balance first (the snowball method) gives quicker wins. Our guide to avalanche vs snowball compares them, and the debt payoff calculator shows your debt-free date.
Step 6: build the full emergency fund
Once expensive debt is gone, redirect the money you were paying into savings until you have three to six months of essential costs. Keep it in an easy-access account or Cash ISA; our savings accounts guide explains how to compare rates. A daily saving habit helps keep the momentum after the debt is cleared; SYM suggests how much to set aside each day.
Step 7: cheap debt vs saving and investing
With no expensive debt and a full emergency fund, the choice gets closer and depends on the rate.
- 0% credit card or purchase deals: pay the minimum, save the rest in an interest-paying account, and clear the balance before the 0% period ends
- Student loans: overpaying usually does not make sense for Plan 2 and Plan 5 loans, because many people never repay in full before write-off. See paying off a student loan early
- Mortgage: overpaying is a guaranteed saving at your mortgage rate. Compare it with savings rates after tax and with long-term investing; see should you overpay your mortgage
- Car finance and personal loans: check for early repayment charges before overpaying
Frequently asked questions
Should I use my savings to pay off my credit card?
Is it better to save or pay off debt with a 0% credit card?
Should I stop paying into my pension to clear debt?
Should I pay off my student loan or save?
How much emergency fund should I have while paying off debt?
- debt vs savings
- emergency fund
- credit card debt
- priority debts
- debt repayment