Should I pay off credit card debt with a financial windfall? What to do with extra money. #CashNews.co

Credit cards can add value to your life with their lucrative rewards programs, exclusive travel credits, trip insurance, and more. While they have perks, it’s also dangerously easy to get carried away with credit card spending. Overspending on your credit cards could make it difficult to keep up with payments and the rising interest costs on your balances.

You’re not alone if you find yourself burdened with high credit card balances. Credit card debt ballooned to $1.21 trillion in the United States in the fourth quarter of 2024, according to Federal Reserve data. While ballooning debt is a big concern, sometimes life takes a surprising turn, and you end up with a surprising financial windfall.

A financial windfall is a sudden, often unexpected influx of cash. It could come in the form of a big tax refund, inheritance, lottery winnings, work bonus, or other surprise income source. While no specific threshold designates a financial windfall, these wins can often amount to thousands of dollars.

While it may be tempting to spend a financial windfall on a vacation or another big purchase, using all or a portion of it to repay your credit card debt is often worthwhile.

Related: 8 smart money moves to make with $1,000

Apart from predatory loans, credit card debt is among the highest-interest ways to borrow money. That’s why paying off your credit cards with a financial windfall can be a smart money move. This is especially true if you’ve struggled to keep up with your monthly payments.

Let’s say you have $7,500 in total credit card debt with an average annual percentage rate (APR) of 23.5% across cards. You’re making $200 payments toward the debt each month, but your interest costs keep adding to your balance, making it harder to make a real dent in what you owe. In this case, paying off your credit cards would take five years and nine months, and you’d incur over $6,000 in interest costs.

Using even a portion of your windfall could make a big difference. For instance, applying $3,000 toward your $7,500 credit card debt will reduce your balance to $4,500. Assuming you keep making $200 payments each month, it would take just two years and six months to repay your debt, and your total interest costs would be about $1,500.

Given that applying a windfall to your credit card debt can result in significant interest savings, it’s worth considering. That said, evaluate your financial situation and other priorities as you decide the best use for your money.

If you’ve recently benefited from an unexpected financial windfall, there are other smart financial moves you can make in addition to paying off credit card debt. Here are some options.

Two in five Americans have no emergency savings, according to a recent survey from U.S. News and World Report. While the majority of Americans may have some money set aside for unexpected costs, 40% say they can’t afford an emergency expense over $1,000.

If you’ve struggled to grow your emergency fund in the past, a financial windfall could be a valuable opportunity. Consider using part of your windfall to jump-start your emergency fund.

Maybe you don’t have credit card debt, but your student loans are burdensome. If that’s the case, using your financial windfall to pay down your student loans could alleviate some stress. Putting money toward your highest-rate student loans first can help significantly reduce your interest costs over time.

Your retirement savings is also a great place to stash some cash, especially if you’ve been working toward increasing your contributions. For 2025, you can contribute up to $23,500 into your 401(k) (with additional catch-up contributions of $1,000 if you’re 50 or older) and $7,000 into your IRA.

Related: 401(k) vs. IRA

While 77% of parents are saving for their children’s college educations, 93% indicate they’re concerned about how inflation will impact future college costs, according to Fidelity.

If you’ve been setting aside money for your child’s education but are unsure how far your savings will go, consider putting a portion of your financial windfall toward your child’s account. Doing so could help boost your college savings and curb some of your worries about inflation and future education costs.

Using extra cash to pay down credit card debt can be a great strategy. But you have other options for reducing your debt if you don’t have money to spare. Here are two to consider.

• Debt consolidation loan: A credit card consolidation loan could help alleviate your interest costs. With this strategy, you borrow a lower-interest loan (such as a personal loan) and use that money to pay off your credit card debt. You’ll generally benefit from lower interest costs over time.

• Balance transfer card: A balance transfer credit card is worth considering if you have hefty credit card debt and great credit. This type of card gives you a 0% interest rate for a certain time frame, often a year or more, giving you a reprieve from high-interest costs as you pay down your balances. For example, you get a 0% introductory APR for 15 months with the Chase Freedom Unlimited Card. The card’s standard APR applies after that.

A financial windfall can provide a unique opportunity to improve your money situation. If you have high credit card debt, using your windfall to pay it down can help alleviate that burden and save you thousands in interest charges over time.

This article was edited by Alicia Hahn.

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