Are You Making This Credit Card Mistake?

Mon, Aug 30, 2010

Budgeting, Financial Advice

Savings are a great thing and a goal everyone should have in their money strategy. However, there are times when it makes more sense to use money that would be put into savings towards other things, like paying down credit card debt. While many people keep savings and credit card expenses separate in their heads, the truth is it can cost you money to prioritize savings over paying off high interest debt.

It is an issue of basic math. If you are carrying $10,000 of credit card debt at 13% interest per year, it is costing you $1,300. Let’s say you have savings of $15,000 collecting 2% interest, which would give you $300 to set off your debt cost down to $1000. If you take $10,000 out of your savings and pay off the debt, you avoid the $1,300 in interest and still earn $100 on the remaining savings. It is a difference of $1,100 that you would not have otherwise had if you paid the interest.

There is always the concern of the “rainy day” and you should keep about a month’s worth of expenses in savings if you can. But in terms of percentages, it is much more urgent that you remove the credit card interest that is slowly draining your finances. Sometimes you have to change your thinking to get off the path of being nickel-and-dimed to ruin.

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