Should I Use All of My Savings to Pay Off My Credit Card? – Hal

Hal

“Dear Steve,

I have an outstanding credit card balance of $ 8,288.76 at 18.99% APR. We are paying roughly $500 a month, which is about 300 over the minimum. However, the finance charges costs about $138, seems to me to be a losing battle. I have 13K in a savings account that is making just over 1.3% interest. Just about 9k should cover 3 months worth of expenses.

I want to know, what many others seem to want to know…Should I pay off the card which costs me ~$130 a month in interest with money from my savings that earns me about ~$70 a year if lucky? The monthly credit card payment would then be applied back to the savings account to rebuild that.

Most of your past advice seems to lean towards keeping the savings…are there any situations in which you would recommend paying off the credit card if this is not one such case?

Hal”

Dear Hal,

I know, my position has been a perplexing conundrum. Mathematically, it does not make sense. But emotionally and prudently it is a better solution.

So let’s say that you do elect to wipe out the savings to pay off the high interest rate credit card. That leaves you out of debt (Ahhhh!) but without a safety net. So why is the safety net so important.

These days it is not unheard of to have a credit card issuer cancel a credit card. If you drain your savings and then are counting on the credit card to save you if you have a financial emergency, what happens if it is cancelled or interest rate raised even higher in the meantime?

If the savings is drained but the card is not cancelled and for some reason you are laid off or need supplemental cash where will you turn? Would you take cash advances from your card that is now paid off? The interest rate for those is sky high? And if you had to charge expenses just to get by, you are right back in debt again.

See also  I'm Back on My Feet and Want to Start to Payoff My Old Debt. - Brandon

If you wanted to leave the savings at the level it is at, fine. Use all your available extra money to pay down the debt as you are.

Basically it all boils down to this. The interest you are paying is essentially an insurance policy that if some wild ass crap hit the fan for you you’d have cash in the bank to pay for it rather than drive you back or deeper into debt. Nobody ever found themselves in an emergency or accident with too much cash in savings.

If you are a risk taker by nature, you think I’m dead wrong, or you like math better than a safety net, do it.

Please update me on your progress by The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

5 thoughts on “Should I Use All of My Savings to Pay Off My Credit Card? – Hal”

  1. Steve –

    What about credit card consolidation? My mortgage is dirt cheap–that is not my issue. I’d like to simply consolidate my credit cards (about $7,400 total) The interest on these is a killer over time. There are so many credit card debt consolidation services out there but it is hard to know which are trustworthy and reliable and which to stay away from. My “financial advisor” does not return my calls regarding this, so I’m not getting much help. I read the post above about paying off debt with savings and know that’s not the answer either. I’d like to consolidate and destroy the cards. What do you recommend?

    Reply
    • Jay,

      If your credit score is above 660, and you have the discipline to not run these cards back up again, the best solution is going to be a loan to pay them off. I’d suggest you look at the peer-to-peer site LendingClub.com as a resource. Any of the advertised debt management or debt settlement services will harm your credit and the cards would be closed by the creditor. If that can be avoided, avoid it.

      If you are unsure what your credit score is, get a copy of your consolidated 3-1 credit report and get the credit score option. You’ll want to take a comprehensive look at what your credit report says about you, look for any errors, and correct them to bring your score up as high as possible.

      Keep me posted on what you decide to do.

      Steve

      Reply
  2. Steve–
    Hehe… while putting financial information in the common vernacular “i.e. wild ass crap” definitely has a lot of merit, I just enjoyed your summation. Debt is just so emotional for so many people and that’s soooo often forgotten by the majority of financial advisors 🙂

    Have a great day!

    Reply
  3. Steve–
    Great advice. This was really profound:
    “Basically it all boils down to this. The interest you are paying is essentially an insurance policy that if some wild ass crap hit the fan for you you’d have cash in the bank to pay for it rather than drive you back or deeper into debt. Nobody ever found themselves in an emergency or accident with too much cash in savings.”

    Love your summation. While it may be tempting to get yourself completely out of debt by using savings, unfortunately, the consequences on your savings account balance could be devastating in an emergency.

    Reply
    • Nicole,

      Was it the “wild ass crap” comment that was the most profound? (LOL)

      The savings vs paying off debt POV is one that so many “experts” miss because they focus only on the numbers. They can’t see the emotional and life value of prudent protection rather than what calculates best.

      I’ve lived long enough now and helped so many tens of thousands of people that my advice is based not on a formula, but real life observation. Nobody is ever sorry they had cash in the bank.

      Thanks for the comment.

      Steve

      Reply

Leave a Comment