How Much Savings to Use to Pay Credit Card Debt?

[desk]

Hi all,

I've been struggling with myself recently as to when to pay off a credit card - stay on my payment plan or take a chunk out of savings.

I have $1400 left on my card (13% APR) that I've been paying off all year.

I have $8300 in savings.

I'd LOVE to pay off the card NOW, freeing up cash for the holidays as well as starting to work on another card ($3000/11% APR).

However, the pay off would put me at $7000 in savings which equals three months of emergency cash if I lost my job tomorrow.

I'm on the tipping edge as to whether to continue with my payment plan (which was originally through December, but interest added up so it will take me through January to fully pay it off) or just buck it up, take the risk and pay it all off now. I put $500 in savings every month, so I'd get back what I paid off within a few months.

Thoughts?

Thanks!

[bjl584]

You should keep 3 to 6 months' worth of cash available as an EF. So, I wouldn't let your savings drop below that level. How stable is your job? Do you forsee a layoff? Do you have other debts? If your job is stable and you aren't overwhelmed with other debts and expenses, then I'd pay off the card today.

[desk]

Job is relatively stable (government, no layoffs expected but then again, who ever expects that?) and the only other "pressing" debt is my other card with $3,000 to pay off.

I have a mortgage but I don't consider that a massive debt. My budget is pretty barebones - just mortgage, utilities, food, insurance and a gym membership and $500 a month into savings.

I also have investments and Roth IRAs and 401K but I don't consider those readily accessible for fast cash.

[bjl584]

Pay off the card. Then focus on the other card. You're savings will rebuild quickly once the cards are gone.

[LuckyRobin]

Since your job is relatively stable, I'd pay off the first card. Actually, I'd pay off both cards and then work on rebuilding the emergency fund as quickly as possible using the regular amount you send to savings plus the amounts you were paying on both cards as well as any extra you could scrape together. But that's just me.

[Ramose]

I agree, pay the card off and work to the other one. Make sure you stay above 3 months expenses.

[neatdesign]

If $7,000 equals 3 months' worth of expenses, then $8,300 equals roughly 3.5 months' worth of expenses. That means that if you lost your job tomorrow you'd only have 2 extra weeks covered than if you had dipped into your savings to pay off the $1,400 balance.

Since you don't feel like your job is in jeopardy in any way, I say bite the bullet and pay off the $1,400 card now. As you said, you'll save it back up again in just about 3 months.

Not only that, but there's something to be said for the empowering and motivating feeling you get from taking proactive steps to paying down debt.

[jpg7n16]

Since you can reborrow on the Credit Card, I'd pay it all off today.

Say you don't pay it off and you have an emergency that requires you to burn through $4,000. You have $8300 to use in cash, and $1400 debt. You use the cash, and are left w/ $4300 in cash and $1400 debt.

Say you pay it off and you have an emergency that requires you to burn through $4,000. You have $6900 to use in cash, and $0 debt. You use the credit card for $1400 and pay the rest ($2600) from cash, and are left w/ $4300 in cash and $1400 debt.

Either way, you would end up with the exact same situation, so why not choose the one that charges no interest? Your EF will be built back up soon enough anyways.

[Tree0164]

I would pay off the credit card and then you can focus on building up your emergency savings again. My security gland is big and I am glad that it is big-my husband got laid off in 2009 and it look 8 months for him to find another one. He did find one with a paycut. Luckily, we had 6 months of expenses. We were able to survive by really cutting down and me working a few more freelance jobs. We now have a years worth of expenses in our emergency fund. It allows me to sleep better.

[rxtrom]

Do you have any other debt besides the 1,400 and 3,000 cards?

I would pay both off today. Your job is very secure and in 8 months you will be back up to 3 months of an EF. It sucks taking huge chunks of savings and paying debt but its the logical thing to do. You are paying someone else 13% and 11% on your money that you are earning .5% on for something that has a rare chance of happening.(job loss)

If that is your only debt then you will be debt free with 4400 in the bank which is a mile above most Americans. (8300-1400-3000+500 from December)

[snafu]

If layoff or downsizing seems unlikely, I too suggest paying off card # 1 immediately. I'd pay down CC # 2 [11% $3000.] CC snowballing the sum that had gone to CC #1 plus regular payment, plus $500. currently being added to savings to knock down the debt that costs 11%. you can quickly re-build EF and savings and go on to investments. Avoiding interest is a big savings when savings accounts pay so little. How much interest have you already paid on these two credit cards?

[Kircheis]

If you paid off both cards with the money in your savings account, how much money would that free up to put into the savings account every month? I personally would favor paying both cards off right away, but it would be good to know how long it would take to build up your savings to at least 3 months of expenses.

[desk]

Thanks all for the advice! I just got my most recent statement for the 13% card and it was at $1,072! Whoo! Just paid that puppy off! According to my unemployment budget with what's left in savings, I still have 3.5 months of an emergency fund.

I figured just 2-3 more payments would pay it off as well, but it will be so nice to free up the cash for December, readjust my budget and put more toward the next card and savings.

Thanks again!