Say someone has a small savings account of about $300. (This is their only cash asset)
But they also have a credit card with about 90% usage. (Lets say the total balance is $900)
Is it a bad move to take that $300 and apply it to that high credit card balance? In my thinking, it can be good or bad. It could be fairly scary to have no savings at all- especially if an emergency did arise, but it would also be beneficial to not have 90% usage on that card.
The other scenario that comes to mind is similar, but a little different:
Say this $300 savings could go to paying off a loan completely or different credit card.
Is this ever worth it? I imagine the savings account could be rebuilt fairly quick in this situation with the monthly payment for the loan or card going into the savings account.
I can definitely agree with that! I just know I’ve heard some people say (essentially) to never wipe out your savings to get rid of a debt, so it’s nice to hear different opinions.
I think that saving is the priority, especially when using the savings to pay debt either only partially pays it down, or leaves you with nothing in savings. If something happens, then the credit card comes out and the balance goes up again. I work with many people who use their tax returns to pay off credit cards, only to build up a balance again. Saving tends to increase savings- you know you have it and want it to increase. Often we don’t think of the balance on a credit card as a negative- its just something that we can keep working towards reducing, but often do not.
That’s my long winded answer. Good scenario to think about!
@kellyfromkeene@mountainfan I agree about the importance of savings – but I think it’s important to run all the numbers. How high is the interest on the debt? How high is the interest on what’s being saved? How much time will it take to pay down the debt, etc? How much compounding will you benefit from via the savings plan? Answering these questions will help make the path forward to maximum efficiency clearer. I don’t think it’s a good idea to hit an investment account to pay down debt – but an ordinary savings account might make sense if the numbers tell you that you’ll be paying an exorbitant amount of interest in an effort to repay while saving (because of the extended timeframe). Also, a great option would be to re-finance that debt to 0% or a very low interest rate – and that could better allow for pursuing both savings and repayment. Good to run the math before deciding!
I can agree with the importance of savings completely. I have fallen into the cycle of paying off a card just to use it for an ‘emergency’ soon after, and it’s not fun to get out of.
It’s also hard to imagine taking out that chunk that’s earning 2.25% interest in a decent savings account. But it does seem more tempting to pay that down if the interest rates are high on the credit card. I’ve seen offers lately for cards with 27% or more!
I agree with @theodora, if your credit card is charging you interest, it is a losing battle because all that money you are saving, you are quickly losing to interest.
In my situation, because a lot of my CC debt was on cards with Intro No APR for X months, I was able to set aside money in both savings and investments without it hurting my finances.
The moment any of those cards starts to charge me interest however, I either find a way to transfer the debt to a no interest account or I pay it off as quickly as possible.
If the high usage only affected your credit score however, and was not charging you interest, it might be wise to let your credit score drop for a bit to get some extra money saved up.
Say someone has a small savings account of about $300. (This is their only cash asset)
But they also have a credit card with about 90% usage. (Lets say the total balance is $900)
Is it a bad move to take that $300 and apply it to that high credit card balance? In my thinking, it can be good or bad. It could be fairly scary to have no savings at all- especially if an emergency did arise, but it would also be beneficial to not have 90% usage on that card.
The other scenario that comes to mind is similar, but a little different:
Say this $300 savings could go to paying off a loan completely or different credit card.
Is this ever worth it? I imagine the savings account could be rebuilt fairly quick in this situation with the monthly payment for the loan or card going into the savings account.
I think saving are made for emergency things that you never imaged it will happen or a particular project
If everyone has the capacity of living in life without credit and has savings I think life would be easier for everyone but not everyone has the the chance to do so.
If it was my situation, I think that the best option for me would be to put the $300 onto my debt with the highest interest rate to pay that down as fast as I could. to pay the least amount of interest that I could, as I wouldn’t be making that much interest in saving the $300 for an emergency. It would leave me without emergency cash, but hopefully I could get the debt paid down to free up more money in the long run for savings.
If $300 is your only cash asset, then it is a bad move to use it for a credit card payment. You have no emergency fund. If you had an emergency, then you’d be forced to use your credit card to pay for it because you have no cash. Build your emergency fund to $1000-$2000 and THEN work on paying off your credit card.
