A couple of months ago, Suze Orman advised her followers to just pay the minimum payments on their credit cards and hoard cash in order to build up an emergency savings fund. She was lambasted by critics who felt that this was an unrealistic goal with high costs.
I’m in agreement with the critics and think making only the minimum payment in order to build up savings is a wrong move. As a matter of fact if you have money in savings, I definitely think you should use it to pay off your credit cards. Here’s my reasoning:
- Credit cards have usually have higher interest rates than savings accounts. The highest interest rate I’ve been able to find on a savings account is around 2%. This 2% rate was only found on internet-only banks; all banks with brick-and-mortar branches offered savings interest at 1% or less.
- Balance Transfers to low interest credit cards have hidden fees. Even if you are move a high interest credit card balance to a card with a zero percent interest rate, you will be paying a minimum transaction fee of 3%. Again, this is a higher interest rate than a savings account payout.
- Recent lowering of credit limits may have dramatically lowered your credit score. It’s all over the news and it most likely has happened to you. Many credit card companies are reducing their exposure by reducing your credit limit. This may be causing your credit score to plunge. The lower your credit score, the more you will be paying in insurance and interest on other lines of credit.
Still not sure what to do? Here are some other factors to consider when deciding whether or not to pay off your credit cards with savings.
- How likely is it that if you pay off your credit card with savings that the bank will take away your credit line or close your account? Though I think most of the credit limit slashing is over, if you are close to using 50% of your credit limit, it’s possible you will get a credit limit slash. If you’ve never kept a balance close to your limit, you’re probably safe.
- How likely is it you will just run up your credit cards again? If This will leave you with no cash AND high credit card balances. If you have a tendency to max out your cards, paying them off with savings might not be a good idea.
It’s my feeling that you should definitely be paying off high interest credit cards with your savings. You will be saving yourself a small fortune. (And you can use the savings to put back into your savings account). You can keep the credit card account open and use it for an emergency fund should you need the money back.
Is this a good practice – using your credit cards as emergency funds? Of course not. But it may be the cheapest route. If you do pay off your credit cards with savings, you should be working diligently to build up your savings again.
Are any of you out there considering paying off your credit cards with your savings? What are your concerns?
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I have always felt that paying the minimum on credit cards is like throwing money in a waste basket, and still feel that way. However, in this environment, keeping cash on hand has become more crucial as staying employed is more of a challenge in almost every field. Therefore, like everything else these days, it is important to look at the overall situation to determine how to deploy cash. Certainly paying down credit card debt saves money in the long run so one should look at each account, note the interest rate, and work on the highest interest rate cards first. Once paid off, these are the cards that should only be used once in awhile for small items and paid completely to maintain credit history. Of course, this takes discipline but having control over ones finances requires a conscious effort and should be an on-going process.