Paying Yourself vs. Paying Credit Cards

[Amy752]

I was all gung-ho to start an ING savings account (sadly I currently have NO savings) until I started thinking.... I have two credit cards to pay off. Should I really start saving when I'll only be getting 3% interest, or should I put all extra money towards the cards, when they're socking me at 14 and 24 percent interest? I know how important it is to have a savings, and I can't wait to start one, but it seems to make sense to go after those cards first. What do you think?

[squirlma]

I have been struggling with the same question. We used to have considerable savings, but after my husband had some medical problems, which resulted in extra bills, on top of him being out of work for a little while, and having all this happen right after putting a lot of money into my new business, our savings has pretty much disappeared. Instead of having savings, we are now in debt, (for the first time in my life) and it is driving me crazy. My first impulse was to put any available $$$ toward the debt, but then I realized that I would be forced to use credit if anything unexpected came up. I decided to save up at least $1000, and after that split any available dollars between savings and credit card debt. If I can ever manage to get the savings up to $3,000, then I will direct all available dollars to the credit card debt. I think it is a good plan. I'm sure there are some that would argue that those dollars would be put to better use paying off debt, but I feel better knowing there is at least a little in the bank for unexpected expenses. (My savings are taking a beating this month, as our central air conditioning went out, and my son has to have his wisdom teeth removed, but I think persistence will pay off.) Hope this helps some.

[miclason]

I was faced with the same question. I started an account with a monthly $10 deposit, so I'm not taking too much away from my cc payments, yet at least I have a start and, once I start paying off cc's, I will "divert" part of the money for the savings and another for the other cc's....I currently have $177 in savings...I know it's not much, but it keeps growing!

[terry1156]

Pay off the credit cards. A lot of people feel safer with having an emergency fund, but in my opinion it is worthless until you get you credit cards paid off. Jeffrey wrote a good article on this. I'll try and find it.

I would put every single extra cent I had into paying off the 24% interest credit card (and pay the minimum on the 14% card until the 24% card is paid off). If an emergency does arise, you'll have room on your credit card to pay for it since you've been paying this down(you don't want to do this, but if you want an emergency fund, you can look at it just as well this way as putting it into a bank account).

Every dollar you put to paying of that 24% card is a 24% return - 800% better than what ING is offering.

[jeffrey]

Originally Posted by terry1156

Pay off the credit cards. A lot of people feel safer with having an emergency fund, but in my opinion it is worthless until you get you credit cards paid off. Jeffrey wrote a good article on this. I'll try and find it.

I think this is the article to which you're referring: <A HREF="http://www.savingadvice.com/forums/showthread.php?t=37">Stop Saving Your Money!</A>

[terry1156]

That was exactly the one I was thinking of - thanks

[Amy752]

Thank you, thank you, thank you! That is exactly the kind of info I need! I am going to put the $100 I was going to put into savings towards that 24% card right now. Since I pay online, I am just going to send them money WHENEVER I have extra! Now it's like a game! I can't wait to see how fast I can pay it off.

Thanks all - I'm loving this website so far!

[terry1156]

You want to make sure that you pay the minimum amount on each of your other debts. Once the 24% card is paid off, then you can put all the money toward your 14% card. Once that is paid off, you can put all your money toward any student loans you have. Then you car. Then your house. This is called "snowballing" and is a very effective way to get out of debt.

It is what we did when we had major debt and I don't regret doing so in the least bit.

[kashi]

This has inspired me. I'm going to stop contributing to my savings account and pay off my credit card in May. It has a 0% interest rate, so it's not collecting anything, but I want it gone so I can concentrate on savings and not feel guilty. It will also make me put off buying a few things I want, but that's ok.

[mccartygirl]

I was reading Suze Orman and she said once you figure out how much extra you have every month to put on cc debt you should put $10 over the minimum pmt and then the rest on the high interest. You're still putting a substantial amt on the highest one but you're also putting more than the min on the others. That's what we're trying to do.

[Tree0164]

The first thing you got to do is stop using the credit cards. If you are currently using them, cut them up destroy them etc.

I would build a small emergency fund. $1000. That way if something happens like you car breaks down you have cash to pay it rather than using the emergency fund.

Then become a crazy lady paying down your debt. I wrote an article in my Jan newsletter http://www.budgetdial.com/news-Jan0105.htm on what steps to take and what my DH and I did to greatly decrease our debt.

[terry1156]

Let us know how the paying off the debt goes.

[neatdesign]

I think your question is a very common one. It seems counterintuitive that NOT saving might be better, doesn't it?

I'm still working on a plan in this area, but one thing I know for sure is that my husband and I need to cut back on eating out. It is a considerable weakness for us! So instead of spending all that money on eating out, I'm going to take half of it and apply it to our credit card debt, and the other half will go into savings. That's the preliminary plan at this point, anyway; those amounts may be tweaked...

But the bottom line is, with the exception of credit cards with 0% APR (which are almost always intro rates anyway), you will always "save" more by paying down high interest credit card debt than plunking that money into a savings account with 2-3% interest rate. Because really, unless your credit card APR is less than your savings interest rate, you're just throwing money away.

~ Jenney

[jhd815]

Neatdesign,

Don't know if you've heard of this but it might interest you and husband since you enjoy dining out. Check out www.restaurant.com, they offer coupons for 50% off meals and other great discounts. You and hubby can still enjoy dining out but put that half you're saving toward paying down debt!

Good Luck!

[neatdesign]

Another suggestion I have about paying down debt is what I've been doing, off and on, for the past year or so. It's sort of a two-part strategy. First, I find a fixed amount that I can afford to pay on a monthly basis. For instance, if my minimum amount due is currently $100 and I can afford that EVERY month, then that's what I'll pay every month -- even though the minimum amount due will go down incrementally as time goes by. Then, I pay $50 every two weeks, making sure I make my minimum payment by the due date.

Now, notice I did NOT say I pay $50 twice a month (ie, 5/01, 5/15, 6/01, 6/15, etc.) -- I pay $50 every two weeks (5/01, 5/15, 5/29, 6/12, etc.) There's a difference! Doing this allows me to squeeze in an extra $100 a year than if I paid $100 a month, or $50 twice a month.

If you pay $50 twice a month, that's $50 x 24 = $1200/year

But if you pay $50 every two weeks, that's $50 x 26 = $1300/year

Of course, this works the same way for savings contributions as it does for paying down debt.

I set this up with my online bill paying service through my bank, so the $50 is taken out of my checking account automatically every 14 days. I find it helps to break up the payments into smaller chunks, and best of all I don't even notice that extra $100 gone at the end of the year.

~ Jenney

PS. To jhd815 -- No, we did not know about that site -- thanks for the link! We may try that out later once we get this under control. Right now we're just trying to cut out eating out (hee, that reads funny doesn't it?) as much as we can.

[Bluezy]

I am a firm believer in having SOME savings put away for emergencies...to not have any standby monies would mean I would accrue a credit card debt to cover the emergency.

I has taken me over nine (9) months to get my emergent debt under control. Unfortunately, this emergency took what savings I had. HOwever, I was thankful for the savings...the debt was not as large as it could have been.

I located a 0% balance tansfer offer from HouseHold Bank, transferred the debt to that account, and will have it paid off in two (2) more months.

Bluezy

[jmjj215]

Originally Posted by terry1156

You want to make sure that you pay the minimum amount on each of your other debts. Once the 24% card is paid off, then you can put all the money toward your 14% card. Once that is paid off, you can put all your money toward any student loans you have. Then you car. Then your house. This is called "snowballing" and is a very effective way to get out of debt.

I've built a tool in Excel that will help you (1) get motivated, (2) plan your attack and (3) keep track of payments. It's especially helpful when you have multiple debts as Terry mentioned above.

PM me if you'd like a copy.

[Cautious Spender]

I agree. Pay off the credit cards FIRST... Add to the minimum. Remember your debt is also compounding so if a given credit card's interest is 14% - 15% you are getting a return. It may also be wise if you have savings to take all your savings out and pay off that outstanding credit card - it's like having an instant NON taxable income of 14% - 15% -- possibly even more. Remember you get no tax benefit from interest paid on credit card debt.

[BAGAGT1]

Save at least $1K for a rainy day, then put all of your extra money to paying of your CC.

[jmjj215]

Save at least $1K for a rainy day

This is crucial. Great advice.