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burningwindmill | Pay off credit card with savings? |
Should I pay off my credit card debt of £3000 with savings, but loose the safety cushion provided by the savings? |
 |
 
Goonhilda
|
Lets see. You have 3000 pounds in savings. They are earning you bugger all interest, which is taxable income.
Say you have at least the same borrowed on a credit card, and that credit card is offering you a rate of 9%. Your savings are earning you 3%. So you're having to find £270 a year to pay on the card, while the savings are only earning you $90 a year, a fifth of which will go in tax, leaving you with £72 profit from the savings to offset the £270 expense. You're effectively throwing away £198 a year by doing this. This example uses very conservative interest rates for the debt. I hate to think what rate you are actually paying, and what rate you are receiving on your savings. The cost to you personally could actually be far greater.
To make keeping the savings and maintaining the outstanding debt financially smart, you would have to get an interest rate on your savings that is 25% higher than that which you're paying on your credit card, to be in front of the debt interest cost, and the income tax. So if you're paying a very cheap 9% on the credit card, you'd need your savings invested at at least 12% to break even. No savings account will offer you an interest rate like that on your savings. It won't happen.
Pay off the debt with your savings, and if you must, leave $500 in the savings account for emergencies. That will save you a lot more interest on the card (on a $500 outstanding balance at 9%, you'd only be paying £45 a year, instead of the $270 currently) and still give you some savings for an emergency. Sure, you would be earning about £12 a year on your savings after tax, but you'd only be wasting £33, instead of £198. That HAS to be an improvement.
It is crazy to be paying interest on a debt while having 'savings' that are costing you money. Every dollar you invest in paying off a debt effectively earns you the interest rate on the loan, because you don't have to find that interest elsewhere in your budget. So get rid of the debt asap, and then start saving. You'll be miles head.
Best wishes |
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Joli
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Yes. The interest from the credit card is huge and continues to grow each month. After paying off the debt, rebuild your safety cushion/savings as quickly as you can. Live on a strict budget to do so - won't be fun for a while, but critical!! |
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STEVEN F
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If you OWE the credit cards, you don't have the safety net. Pay off the cards, CLOSE the accounts, and get busy rebuilding your emergency fund. |
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metal trash
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maybe use 2/3 of it to pay towards credit cards and still have some for emergency. |
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Dex
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Yes.
Then in a pinch you can always use your credit card to bail you out, otherwise it'll soak up your savings eventually in fees anyway. |
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Eric
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What's the point of earning 1% interest on a savings account when you are paying out 15% interest on a credit card balance? You're losing money. Pay off the credit card and start saving your safety cushion again. If you run into an EMERGENCY while building up your savings again you can use the credit card. Do not use the credit card for anything else! |
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G T
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I would say pay part of it off then make regular payments to pay the remaining balance |
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Matt
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Keep your savings as an emergency fund, only using it if you are in a financial bind. Then start a budget / cash flow plan so that you can budget for paying more than the minimum payment on your credit card.
The risk you take in using your savings to pay off the credit card is that you will have an emergency once the card is paid off. If you spent your savings to pay off the credit card and then have an emergency, the only way to pay for things will be with the credit card. This would leave you back in debt without a safety net. Plan to pay aggressively on your debt and live within your means by budgeting.
At www.cashinfull.com there are free budgeting sheets on the downloads page and you can get a lot of information regarding cash flow planning and emergency funds.
I hope this helps! -Matt |
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Hometown Girl
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You should keep 3 to 6 months expense money in your savings - I understand the 3,000 may not do that. Then with savings beyond your 3 to 6 month cushion you should pay off your credit cards.
However, you cannot continue to use credit cards and do this. It defeats the purpose. You have to be willing to live within your means to take care of the problem.
If you don't have your savings cushion built up yet, then concentrate on living within your means first, building up the cushion second and then paying off debt third. As long as you continue to make your payments and don't get further over your head you will make progress. |
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lbaker2656
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Yes as you will be charged a load of interest on your credit card so it will keep going up and up until you pay it off. |
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QUESTION GIRL
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SUZE ORMAN SAYS NO |
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Elaine V
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BUY PRAWN COCKTAIL CHIPS YOU WILL GET YOUR REWARDS FULFILLED BY A MAN NAMED BELVEDERE IF YOU DO. GOOD LUCK!
E.V |
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maxiemax
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is there a way you can use your savings to get a secured loan to pay off your credit card?
interest on the loan would be much lower and it's easier to pay back than to put back.
AND CUT UP THE CREDIT CARD or use for REAL emergencies only |
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