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Judy Is Worried “Should I Save or Pay Off Credit Card?”

Judy

“Dear Steve,

Should I save the amount after paying off a credit card debt or pay down another.

Help please.

Judy”

Dear Judy,

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You asked a great question and one that seems easy but has different valid and possible answers.

If you are digging yourself out of a debt hole the initial knee jerk reaction is to devote all your extra money to paying down the next card but I don’t think that is the smartest thing to do.

You see life is unpredictable and we never know what the next financial surprise will be. Unless you have access to some liquid cash to get in a hurry those unexpected expenses could wind right back up on the plastic, eroding any debt reduction progress you previously made.

I think the better approach is to buildup your savings account at the same time that you are trying to reduce the debt. I’m assuming that we are starting from a position that you have little to no savings to begin with.

I would suggest that after you pay off your first credit card debt that you either put the extra into a savings account for a few months to build some cushion or put half of the amount into your savings account each and every month from that point forward and use the remainder for additional debt reduction.

This approach of rolling your payments forward is know as the debt snowball approach. There are two basic theories to accelerating debt repayment. Those that are diligently organized find that extra money applied to the card with the highest interest rate makes the most mathematical sense. The the rest and majority of the population finds that it is more emotionally rewarding to focus on paying off and sending your extra payment to the card with the lowest balance. By knocking off accounts quickly you get a greater emotional boost to keep going. That’s the debt snowball approach, simplified.

Thanks for writing in.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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