New Guy with a Personal Finance Question

[AccountAnalyzer]

Just want to say hello to everyone and here is my situation


I set a financial plan for 12/31/07 to have $3500 in the bank and right now I'm trying out what to do in regards to my savings account and credit Card debt.

The money in my account is $1100 more than what my credit card debt is and I'm trying to decide whether I should just pay the CC balance in full right now and have my account fall $1100 and just set a new goal for 12/31/07?

What I planned on doing was letting my account grow to $3500 to $4000 and just pay the minimum payment on my credit card bill until the end of the year. What makes more sense?


thanks

[mom-from-missouri]

IMO, several things should be considered.
#1--Do you have a decent credit score or do you need to carry a CC balance to establish one or to improve one??
#2 What kind of interest are you paying on that credit card??
#3 What kind of interest are you earning in your savings account?? (Their are other accounts that pay better interest than a regular savings account)#4 Do you have an emergency fund set up??
#5 Are you still using the credit card??

[AccountAnalyzer]

IMO, several things should be considered.
#1--Do you have a decent credit score or do you need to carry a CC balance to establish one or to improve one??
#2 What kind of interest are you paying on that credit card??
#3 What kind of interest are you earning in your savings account?? (Their are other accounts that pay better interest than a regular savings account)#4 Do you have an emergency fund set up??
#5 Are you still using the credit card??

The savings account is the emergency fund and yes I still use the credit card.

[disneysteve]

1. You need to stop using the CC immediately. Otherwise, you are just adding to your debt. From now on, cash only. If you can't afford it, don't buy it.
2. If you have the money to pay off the CC, pay it off. It makes no sense to keep money in the bank earning 5% if you are paying 18% on the CC interest.
3. You do NOT need to carry a CC balance to establish or improve your credit score. Just using the card and paying the balance in full each month will work just fine. But until you are able to pay the bill in full each month, you should not be using the card at all.

[loanstar]

The money in my account is $1100 more than what my credit card debt is and I'm trying to decide whether I should just pay the CC balance in full right now and have my account fall $1100 and just set a new goal for 12/31/07?

IMO that's the sensible thing to do, there's no reason why you should carry a debt when you can afford not to. besides, if something comes up in the future, the money on the credit card would still be available for you to use.

[Kev101]

I suggest you stop spending. Don't use the card and buy cash so if you don't have the cash then save until you can buy cash.

Rather pay the card off in full in two instalments if you can because you are paying a higher interest on the card than you are earning from your savings account and that means your money is not working for you even if it's in a savings.

[anonymous_saver]

Pay off the balance of your CC immediately. Never keep a balance again, try using it once a month for groceries or something but then pay off every month (I go home and immediately pay my credit card off whenever I use it).

Then start building up your emergency fund again.

How are you doing on any other kinds of debt, or retirement savings, down payment, etc.?

Do you have a high interest savings account?

[AccountAnalyzer]

Pay off the balance of your CC immediately. Never keep a balance again, try using it once a month for groceries or something but then pay off every month (I go home and immediately pay my credit card off whenever I use it).

Then start building up your emergency fund again.

How are you doing on any other kinds of debt, or retirement savings, down payment, etc.?

Do you have a high interest savings account?

I have a free interest checking account with no minimum balance requirement. A secondary checking account for backup

[thekid]

Why are you paying high interest costs (probably 18% or more) on your credit card balance and leaving the money in a low/no interest bank account?

I would pay off the credit card in full (which you should do each month......the interest will absolutely kill you if you don't) and then built up emergency fund. Oh, and find a high interest account to put your money in.

[AccountAnalyzer]

Why are you paying high interest costs (probably 18% or more) on your credit card balance and leaving the money in a low/no interest bank account?

I would pay off the credit card in full (which you should do each month......the interest will absolutely kill you if you don't) and then built up emmergency fund. Oh, and find a high interest account to put your money in.

My interest rate is 14.24%.

[thekid]

My interest rate is 14.24%.

Nonetheless, you are earning much less in your bank account. Think of it this way, by not paying your credit card you are losing approx. 10%. Why?

Don't mean to be inquisitive, but what's holding you back from paying off your credit card?

[AccountAnalyzer]

Nonetheless, you are earning much less than that in your bank account. Think of it this way, by not paying your credit card you are losing approx. 10%. Why?

Don't mean to be inquisitive, but what's holding you back from paying off your credit card?

Well, in June of 2006 I was laid off and I have to live of my emergency funds which was $4000 at the time. By time I found another job it had fell all the way down to $700. So I have been in the process of building it up and wanted to hit $5000 by 1/15/08. So I was saying that if I paid it off I would have to set a new goal. So I was more focused on a growing bank account and just paying $200 a month out of my regular paycheck each month.

[thekid]

Well, in June of 2006 I was laid off and I have to live of my emergency funds which was $4000 at the time. By time I found another job it had fell all the way down to $700. So I have been in the process of building it up and wanted to hit $5000 by 1/15/08. So I was saying that if I paid it off I would have to set a new goal. So I was more focused on a growing bank account and just paying $200 a month out of my regular paycheck each month.

Thank you for your reply. You are quite correct that maintaining a well funded emergency fund is a high priority. However, in your current situation where you again have an income stream, leaving the money in a low interest account and not paying off your high interest credit card balance is causing you to lose money, each and everyday. I would pay off the cards and build the emergency fund up from the 700$.

Paying off the credit card does not make the money "disappear". It eliminates a debt. In the end, what matters is your net worth (assets minus liabilities). So, if you have 3500$ in your bank account but a 2500$ credit card debt, what you really have is 1000$ clear. Same thing if you pay off the credit card. The difference between the two, is that by paying off your credit card you will stop paying a high interest on your balance. You will therefore save money that will help you grow your emergency fund. Also, by no longer having to make monthly credit card payments (provided you stop using it), you can add the money you where previously paying towards your CC to your emergency fund. This will make it grow much faster than before.

Also, you should look into opening a high interest savings account (with ING or the like) and keep your emergency fund there. This will also help you grow your EF faster.

[Scanner]

AccountAnalyzer,

I agree with the majority here - pay your credit card.

Your sentiment actually isn't that bad - you can't build wealth if you are always tapping emergency funds, rebuilding it, and tapping it. There is something to be said for building assets.

You may not know it but you are instintually playing with the concept of "leveraging" - how do I best leverage myself?

Is it okay, for instance to have

$100,000 in assets

and

$100,000 in liabilities

NET WORTH = 0

or

0 in assets

and

$0 in liabilities

NET WORTH = 0

One person is highly leveraged; the other person is non-leveraged. To me, the first person is actually in a better position than the second. But many here would disagree.

A better way to use credit is to get a home equity line of credit where the interest rate will be much more reasonable. Then, it becomes more interesting - do you pay down the debt and watch your savings evaporate or keep the LOC afloat and let your assets build.

With a 14% interest rate though, it's a no-brainor - pay it off. Consumer debt is not something you want to leverage yourself with.

[AccountAnalyzer]

Thank you for your reply. You are quite correct that maintaining a well funded emergency fund is a high priority. However, in your current situation where you again have an income stream, leaving the money in a low interest account and not paying off your high interest credit card balance is causing you to lose money, each and everyday. I would pay off the cards and build the emergency fund up from the 700$.

Paying off the credit card does not make the money "disappear". It eliminates a debt. In the end, what matters is your net worth (assets minus liabilities). So, if you have 3500$ in your bank account but a 2500$ credit card debt, what you really have is 1000$ clear. Same thing if you pay off the credit card. The difference between the two, is that by paying off your credit card you will stop paying a high interest on your balance. You will therefore save money that will help you grow your emergency fund. Also, by no longer having to make monthly credit card payments (provided you stop using it), you can add the money you where previously paying towards your CC to your emergency fund. This will make it grow much faster than before.

Also, you should look into opening a high interest savings account (with ING or the like) and keep your emergency fund there. This will also help you grow your EF faster.

Is that something like a money market account?