Credit card debt and savings

Question: We recently bought a home and got our "Obama Money." That's what we call the $8,000.00 tax credit we received. My question is; should I use some of this money to pay off my credit card debt? I have no debt, other than our mortgage, but $4,000 with an 11.99% interest rate on my credit card. The upside would mean I would be credit card debt free! The downside is we would have half of our savings gone. Any advice is much appreciated! Sarah, Indianapolis, IN

Answer: Well, I would definitely use the money to attack your credit card debt. Put it this way: Paying off the loan is the equivalent of an 11.99% return on your money. Not bad under any circumstances, but especially nice now when rates on savings range from 0.1% to 2%. What's more, whenever you pay off credit card debt you're boosting your savings.

That said, I understand your hesitation about cutting your savings in half. The sputtering state of the economy is making everyone nervous.

What do you think of this idea if you'd like to keep more cash in reserve? Reduce the credit card debt by $3,000--or some other figure, like $2,500 or $3,500--with the "Obama Money". You've eliminated the bulk of the debt. You then get aggressive about paying off the remaining bill from income--not savings--over the next several months. You pay more than the minimum each month until the credit card bill is done.

This approach will cost you a bit more in interest payments. But it has the advantage of pushing you to come up with extra money every month from your income for debt repayment. That discipline can continue when you've eliminated the debt. But the money goes right into savings.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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