Dip into savings to pay off credit card?
July 30, 2014 12:19 PM   Subscribe

My credit card is acruing interest at about the rate of netflix per month. I have enough cash to pay it off but that would be about half my balance of my savings account. Should I pay it off or should I keep chipping away with it and not putting any more than I have too on the card?
posted by mamamia88 to Work & Money (15 answers total) 2 users marked this as a favorite
Pay it off, then put the amount of your credit card payment back into savings every month.
posted by rabbitrabbit at 12:22 PM on July 30, 2014 [34 favorites]

Assuming this is a bank savings account (which it sounds like) that's earning very little/no interest, and the remaining half would be a sufficient emergency buffer for you, yes, by all means - pay it off.
posted by obfuscation at 12:23 PM on July 30, 2014 [3 favorites]

Are you gainfully employed?
If you lost your job tomorrow, how much money would you need to live for 3-6 months?
Do you have that much in your savings?
Do you have twice that much in your savings?

Your APY on your savings account is I'm certain less than your interest rate on your credit card. Whatever you don't need for your emergency fund, use that to pay down your credit card debt.

Cut back on any nonessentials (suspend netflix, brown bag your lunch, use the library instead of buying kindle books, whatever) and put that extra money into paying down the debt until it's gone.
posted by phunniemee at 12:24 PM on July 30, 2014

Agreeing with everyone to pay it off, but lemme explain why (the way someone explained to me):

Say the interest rate for your credit card is 10%, but the interest rate for your savings is 1%. Since you're being charged 10% and credited 1%, that works out to -9% interest your money is making overall.

If you pay off the credit card debt, you are now getting charged 0% and you're still getting 1% interest on savings. That works out to 1% interest your money is making overall.

And since it's better to be MAKING 1% then it is to be CHARGED 9% every month, you should pay off the card in full.
posted by EmpressCallipygos at 12:26 PM on July 30, 2014 [9 favorites]

How high is the interest rate on your card, how high is the current balance, and would half your current savings still leave enough for, say, expensive emergency car repairs (think transmission-level expenses)? If the rate is high, and the balance around $5-6K (leaving that much again still in savings), I'd say yes, pay off the card and aggressively add back to the savings account in the future. At the very least though, pay off as much as you possibly can every single month until the balance is zero --- do not just pay the 'minimum monthly payment', that's a guarantee you'll be paying on that card forever.

Right now, you're paying that interest rate to the bank to borrow money by credit card, but they're basically paying you almost nothing to borrow from you via your savings account.
posted by easily confused at 12:28 PM on July 30, 2014 [2 favorites]

You should never pay interest when you can afford not to. What are you getting in return for that extra money you're paying to your bank? Only the privilege of not having to pay it off right away. Is that worth the money?

Put another way, as previously mentioned upthread, savings accounts don't earn that much interest, and certainly not nearly the same percentage rates that credit cards charge. You're actually losing money in the long run by keeping a credit card balance.

Pay off the credit card in full, provided you're not putting yourself in a precarious financial situation in order to do so. Then concentrate on restoring the balance of the savings account in the near future.
posted by tckma at 12:38 PM on July 30, 2014

I wouldn't get myself into a precarious situation but, I do need a new car before winter comes. I live a mile from work but it can get super cold here in the chicago suburbs. I only have one bill about $15 a month going onto the card so I'm thinking it might be a good idea go just move the bill to my debit card and keep on chipping away. I reduced the balance by about 20% this month so with nothing else going onto the card I can probably pay it off rather quickly. I shredded the card up and can delete the info from amazon and paypal and basically stop myself from touching it. I only have one other credit card and the balance on that is only $15.I'm just torn on whether it's worth paying $8 a month toward interest for the peace of mind of having a decent amount of cash set aside for an emergency.
posted by mamamia88 at 12:46 PM on July 30, 2014

Figure out how much you need for an emergency fund, and throw everything else at the credit debt.

To do the first part, you'll need to think about which emergencies are reasonably likely (job loss, car repair, house repair?), how low you can cut your expenses if necessary, who depends on you (spouse/kids?), and how screwed you'd be if your credit card got cancelled and you didn't have the savings to pay for whatever emergency comes up (car required to keep job? family/friends available as safety net? mortgage payments?).

So we can't really give you a dollar amount to keep in your savings - it depends too much on your situation and risk tolerance.
posted by randomnity at 12:50 PM on July 30, 2014

I would leave the one bill on the credit card, as long as you have otherwise stopped yourself from touching that card. Two reasons:

1. Credit card protections are better than debit card protections. Say the company that sends you that bill suddenly raises it without warning, or a rogue employee of that company steals your card number. A credit card bank deals with this much better than a debit card bank, specifically by restoring the amount lost to you quicker.

2. Having credit that you're not using (whatever the credit limit is on the card you're not touching, minus the $15 bill) is good. It's good for your credit score. It's also good as an emergency-backup emergency fund, for in case your emergency fund runs out. If your personality is such that you get tempted to use the card outside of the most dire emergencies, make it so that you'd have to call the company and request a replacement card in order to access those funds...giving you a few days to cool off and reconsider.
posted by Bentobox Humperdinck at 12:58 PM on July 30, 2014

Also, once you've paid off that card and are only using your debit card: don't close the credit card account. A chunk of your credit rating is predicated on how much credit you have available --- a paid-off credit card with a $10,000 limit means you have $10,000 available; that same card with a $6,000 balance means you have $4,000 available.

Lenders like to see a higher amount currently available to you, as well as a lower amount currently owed, both of which could make a difference in the interest rates you're charged if you do end up having to buy a car soon: a higher current debt = higher risk to the lender, which in turn = higher interest rates paid by the borrower.
posted by easily confused at 1:00 PM on July 30, 2014

You can also pay off half of the balance and then aggressively pay down the rest. Don't use your debit card for anything except for cash withdrawals. Credit cards offer far more protections if your number is stolen while the account connected to your debit card could easily get drained and it's much harder to get that money back.

I use my credit cards for everything and as soon as I get paid (twice a month), I pay them down to zero. So, I accrue points and benefits while paying no interest. I do have a savings account, but the fact that I don't have a lot spent up on my credit cards also allows me a credit reserve in addition to savings.
posted by quince at 2:29 PM on July 30, 2014

Straight math says pay off the credit card bill today, repay your savings account every month and don't stop when you get the amount of your credit card debt - your saving level is pretty low, you should keep saving away every month so you have will have more freedom later.

However, I think your own psychology is a big factor. Can you trust yourself to put the money back into savings every month? Is it worth paying about $50 interest (5*$netflix) to the bank to keep up the pressure to repay the debt? It is better to pay $50 in unnecessary interest and keep your saving intact than to save $50 by paying off the bill today but leaving your savings at 1/2 the current level because you didn't repay yourself. Your choice.
posted by metahawk at 3:12 PM on July 30, 2014

Metahawk has nailed it.

I would go further - can you discipline yourself not to run up the credit card account again? It might be you find the credit card debt a brake on further credit card spending and more debt, remove that debt and the brake is gone too ... you could end up with half your savings, and still have (again) big debt.
posted by GeeEmm at 3:24 PM on July 30, 2014

Is the credit card account otherwise in good standing? If so, just pay it off. In a situation where you would need your emergency fund, you still have access to all of the credit on that credit card as long as you don't close the account. The only advantage that your savings account has as an emergency fund is that it doesn't cost you anything to it out in cash. Unless you're worried that you're going to need to pay someone's ransom or something, you'll be able to use the credit card instead.

It's unlikely that you'll actually need to use the emergency fund and, even if you do and end up racking up a balance on the credit card equal to the balance you would have had by making payments as you are now, you'll be no worse off (assuming that the nature of the emergency doesn't require a cash advance) and you'll have saved yourself all of those interest charges.

As others have said, this assumes that you have the requisite financial discipline to do all of that.
posted by VTX at 3:37 PM on July 30, 2014 [2 favorites]

I agree with VTX; the math says that you'll save money just paying it all off right now. The "emergency" money in savings argument doesn't really hold water for me, since you aren't changing your net worth by paying it off; either you have your debt (which accrues interest faster than your savings account) offset by whatever you have in savings, or you have less savings and no debt, and you continue to have access to the credit in your credit card, which you can use for whatever emergency may come up just as easily. In other words, the worst case for paying it off immediately and then later having an emergency come up is that you end up in a slightly better situation than you are now, because you have paid less interest on your debt, but still have access to at least the same amount of cash and credit combined.

Obviously, in order for this to work, you can't immediately go back and start putting unnecessary debt back on the card; if you continue to use the card, you'd need to treat it like a slow debit card, paying off the balance in full before the grace period on your purchases expires. Then, when a theoretical emergency comes up that can't be covered by savings, you can borrow against that credit if you have to.
posted by Aleyn at 3:54 PM on July 30, 2014 [4 favorites]

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