Savings vs. debt for short-term gap-stopping
March 19, 2014 10:59 AM   Subscribe

If a person is flat broke for a relatively short period of time (<10 days) but some expenses are unavoidable during that time,* is it better to raid a savings account or to use a credit card to pay for the expenses? Assume that the interest rate on the credit card is shamefully high, and that the savings account is very modest (<$500) but nonetheless a good morale booster and safety blanket.

But which is best to avoid--gutting a savings account, or getting back into credit card debt after a decade of clawing out of it?

*And that selling things, borrowing from family, getting a second job, negotiating interest rates, etc. are not options.
posted by magdalemon to Work & Money (26 answers total)
Assuming that your savings account is making something approaching 0.00% interest, it is much better to spend the savings. Don't borrow. I get it about a morale booster, but borrowing is a trap.You are living awfully close, so it would be only one small incident that could keep you from paying that debt on time.
posted by Houstonian at 11:02 AM on March 19, 2014 [1 favorite]

Savings, that's what it's there for.
posted by Ruthless Bunny at 11:04 AM on March 19, 2014 [3 favorites]

If the cash gap is just 10 days, and the needed funds would be available on the 11th day, I'd personally use credit and repay it on day 11. Cards vary w/r/t how interest is calculated (e.g., closing balance versus average balance), so you may bear some cost of borrowing. But again, if you expect to have money on day 11, the financing would probably not be high, even with a high APY.

Reasonable minds may differ about whether being broke for 10 days is an emergency, but I'd hate to spend my last dollars of savings on my cell phone bill only to break my leg and need to buy a pair of crutches and find the account empty.
posted by Admiral Haddock at 11:06 AM on March 19, 2014 [13 favorites]

If you have the money in savings then use the credit card and then pay the credit card when it is due so you don't pay any interest. If it turns out you're broke for longer than 10 days and you need to raid your savings to pay the credit card, then do that, but absolutely don't miss the payment.

I can't speak to the mental cost of putting it on your credit card after a decade spent getting out of debt though.
posted by ODiV at 11:08 AM on March 19, 2014 [8 favorites]

(My answer was assuming that your CC doesn't charge interest until a payment is past due. If you're talking about a cash advance or something where interest starts accruing right away, then disregard what I said.)
posted by ODiV at 11:09 AM on March 19, 2014 [3 favorites]

I'd hate to spend my last dollars of savings on my cell phone bill only to break my leg and need to buy a pair of crutches and find the account empty

If so, then the Credit Card can be used.

I'd rather raid my savings and stay out of debt. But as you said, reasonable people can disagree.
posted by Ruthless Bunny at 11:16 AM on March 19, 2014 [1 favorite]

If you'll be able to pay off your credit card in full when it comes due, credit card is probably fine. That's what credit cards are for.

If the ten days of flat broke-ness escalates to an ongoing situation of robbing Peter to pay Paul (due to living paycheck to paycheck, for instance), you may as well just take the money you need out of savings.
posted by Sara C. at 11:26 AM on March 19, 2014 [3 favorites]

Savings. You pay no interest. If you run out of savings, you still have the credit card if you need it.

If you do it the opposite way, you're paying interest, and yes, you still have the savings if you need it, but you no longer have the credit.
posted by tylerkaraszewski at 11:26 AM on March 19, 2014 [1 favorite]

I use credit card regularly. Every month it is paid off in full and no interest is added. In fact my card is a cash back card, so I make money on that. If I did not pay it off then I have a interest to pay.

On the other hand if psychologically someone could not handle using a credit card in that fashion and would likely start charging too much, then I would stay away from that.

In the end you are financially better off not paying any more than you have to. If charging the bills to a card means you spend an extra 20 dollars then that should be 20 not spent by instead pulling from your savings and in the end is financially way better.

Psychology really does play a role for some people, but what ever costs the least amount of money is the smartest choice if you ignore any psychological influences.
posted by Jaelma24 at 11:41 AM on March 19, 2014 [3 favorites]

If OP's credit cards work like mine do, charging something on the card for 10 days will not accrue interest. Which, if the money coming in 10 days later is enough to cover the credit card bill (and is actually used to cover the credit card bill), makes the options effectively even in my mind. To me, it isn't "credit card debt" if you don't carry a balance and do not pay anything in interest.
posted by craven_morhead at 11:41 AM on March 19, 2014 [4 favorites]

If you can pay it back after 10 days (before the credit card is due), I don't see how it matters much either way -- but I would keep the savings there for an emergency.
posted by J. Wilson at 11:42 AM on March 19, 2014

Hmm my first thought would be, given the situation, to use the credit and pay it off immediately after the 10 days. That way if any other emergencies came up that were for some reason cash only (Like your car was towed and needs to be paid in cash to pick it up for example. That happened to me once), you would have it. But...I thinking further, I think I'd chance it by using the savings, and on the off chance if I had a cash-only emergency come up, I could always take a cash advance on the credit card (and pay back right away). So, yeah I'd go with the savings if I were in your place, that's what it's there for.
posted by Shadow Boxer at 11:42 AM on March 19, 2014 [1 favorite]

I'd say savings, because there's less chance of something going wrong. If you pay the credit card off within 10 days then there's no harm and no foul--but what if you can't? What if something unexpected happens, and you suddenly have to use all the money that's coming to you for some other emergency expense? Or what if there's some annoying computer glitch or human error that delays your money for a few more weeks? By the time it gets to you, you could be so far behind that you can't pay the balance like you thought. You could potentially end up paying interest and carrying some long term debt despite all your best intentions. On the other hand, if you take it from your savings, then the worst that can happen is you'll have a little less than you did before, and it will take longer than you thought to build it back up again. Taking from your savings sounds safer to me, so that's what I would do in your situation.
posted by sam_harms at 11:59 AM on March 19, 2014

Think about it this way: You're going into "debt" to cover this short term gap either way. You either "owe" the debt to your savings account, or owe-no-scare-quotes the debt to the credit card company.

That being said, I feel like it's 6 of one, half a dozen of the other as long as you remember that once you get the funds to cover this gap, you "owe" that money to whatever source funded the gap.

If you can be disciplined about rebuilding your savings after you have the money again, then you'll have your "cushion" back. On the other hand, maybe you need the external discipline of a credit card bill to force you back on track.

What is financially/mathematically best in this situation depends on a number of factors that have been brought up by other commenters. But given the dollar amounts we are talking about here ($500), the interest cost is likely to be trivial. So think of it like Suze Orman's snowball method -- it's not the most financially optimal, but it is psychologically effective and the "cost" is minimal.

So, given that either way works fine, I say you use your savings, as there is less risk of being hit with a nasty interest charge/late fee if things continue to go squirrelly.
posted by sparklemotion at 12:03 PM on March 19, 2014 [2 favorites]

Credit card. In an absolute worst case scenario, you can declare bankruptcy or simply not pay your credit card bill, but you can't get your savings back. $400 would be yours to keep in a BK. In the scenario you predict, you can just pay the credit card back ASAP. So in this case, using a credit card is more risk-averse.
posted by the young rope-rider at 12:12 PM on March 19, 2014 [4 favorites]

My philosophy is that using the last of my actual cash should be the last resort. You can save your ass in an emergency with a credit card about 75% of the time, but with cash it gets closer to 100% (assuming the ass-saving can be accomplished with money in the first place).

So I'd rather be in dire circumstances with a maxed-out credit card but $200 out of an ATM.

Use the card, pay it back as soon as humanly possible.
posted by Lyn Never at 12:14 PM on March 19, 2014 [3 favorites]

An analogy: say you're hiking along a steep slope, and you come to a path with a tree in the middle of it. The path clearly goes around the tree on both sides. I see taking the side that puts you right next to the steep slope as equivalent to using the credit card. It might be fine, but why go that way when there is another, less risky path?

As I'm sure you're well aware, credit card companies aren't lending money out of the goodness of their hearts. They're lending money because they're counting on the interest. Stay away from the cliff. Borrow from your savings. And repay yourself, with interest.
posted by aniola at 12:33 PM on March 19, 2014

It's not credit card "debt" if you are certain that you'll have the money to pay it off before any interest is charged. Doubly so if you have that money in savings and can use that money to pay it off if necessary.

Spending savings makes zero sense in this situation unless you have psychological issues with credit card or the credit card will charge you interest. Unless you're taking a cash advance from the credit card, I don't know of any credit card that will charge you interest if paid off in full and on time (generally 21 days after each statement). And even then, the interest on <500$ for <10 days will be tiny, so it's probably worth paying a few extra bucks to hold onto the security of your emergency savings.
posted by randomnity at 12:34 PM on March 19, 2014

If you are in a ten-day gap this critcal, I worry that you won't be able to pay back the credit card in time to avoid interest.

For psychological reasons, I lean toward savings in your case.
posted by Lesser Shrew at 12:38 PM on March 19, 2014

My philosophy is that if you have already gotten into and clawed your way out of credit card debt, it's time to make a goal of abstaining from credit card debt. You're used to being able to rely on the credit, but it provides a false sense of security.

Learn to rely on your savings the way you used to rely on your credit. However much money your card limit was should be your minimum savings. That way you can go into debt to yourself, instead. This means that if you need to borrow from savings, it's ok! You'll pay yourself back!

What I'm saying is that this is exactly why you have savings. Keep clawing! You'll get there!
posted by aniola at 12:44 PM on March 19, 2014 [1 favorite]

So, you've seen answers are pretty well split between cash and credit.

I think your actions should depend on how well you know the ins and outs of your bank, credit card, online banking, and how reliable that next paycheck is.

If you know you're getting a direct deposit, rock solid, and your bank is going to post that at 10am on payday, and payday is on this side of your credit card bill due date, then go with the credit.

If your payer is squirmy, you'd need to deposit a check and it takes 3 days to post, if you're lucky, you're not sure when you hit credit interest, go with the cash.

Should you go with the cash, pay your savings back right away.
posted by fontophilic at 1:48 PM on March 19, 2014

If the payment isn't due on the credit card until the person regains income and can pay it off in full, credit card all the way. That way you get the benefits of the card's purchase protection and, depending on the type of card, rewards.
posted by vegartanipla at 2:02 PM on March 19, 2014 [1 favorite]

From personal experience, use the credit card. Having access to zero cash is an emergency in a way that having a maxed out credit card isn't.
posted by rue72 at 4:21 PM on March 19, 2014 [1 favorite]

For me, it depends on what it is. If it's an expected, regularly issued bill, then it go on my credit card and get paid off ASAP (I also have a buffer of cash in my everyday account that will generally help even out things). If it's a large purchase or emergency eg. laptop dies, overseas holiday, that comes out of my savings account, because that's what it's for. If I find myself unable to pay off my credit card quickly, and have to dip into my savings to do so, I take that as a sign that something in my spending/budget is off, and will be a bit more careful with money for awhile.
posted by kjs4 at 5:59 PM on March 19, 2014 [1 favorite]

Credit card, even if you end up with an interest bearing balance. $500 is far too low a cash stock in any event. Liquidity is important above all else; a credit card can be canceled when you most need it, the bank won't seize your savings account.
posted by MattD at 9:28 PM on March 19, 2014 [2 favorites]

Payment on a credit card isn't usually due for 25 days - the minimum by law might be something like 20 days?

So: you charge today, suppose your billing cycle closes tomorrow in the worst case - they mail you a statement, and then payment is due ~20 days after your cycle closing date. If you don't want to pay interest, you need to pay in full (and have no existing balance on the card that you're already paying interest on, obviously).

If you're set up to pay the CC bill online (no stamps or "lost in the mail" issues) and you're not paying a fee for the transaction and you're *sure* you'll be able to pay off in full when the bill is due, there is very little downside to paying with the credit card. On the upside, it keeps your account active and shows you using credit responsibly, which is useful for your credit history, should you care about that. It also gives you the purchase protection advantages of your credit card.

If you're not sure about any of the above factors, raid your emergency fund and pay cash. That's the (overly) conservative option.

(Why are you calling it "credit card debt", by the way? If it's a cash advance, forget everything I said above - do NOT take a cash advance or use one of those "cash advance checks".)
posted by RedOrGreen at 12:26 PM on March 20, 2014 [1 favorite]

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