Ask Money

Credit Card Debt

Chris Farrell Jun 26, 2008

Question: I’ve accumulated some credit card debt (due to a drop in planned income) in the last 6 months. At this point, I have some money in a savings account that could pay off that debt but it would empty the savings account. I’ve been reluctant to do that because it’s my emergency fund (car breaks down, some major home repair) – but since I haven’t been able to make a lot of headway on the credit card debt I’m starting to question that choice. Is it worth the risk of emptying the account to pay off this credit card debt? Both the debt and the savings account are less than $2K at this point. Sheri, Rochester, NY

Answer: In theory, there shouldn’t be much of a difference between having $2,000 in a savings account and draining that bank account to pay off a $2,000 credit card bill. A credit card without any debt is a form of savings.

That’s in theory. Psychologically, most of us like to have cash in the bank even if we are carrying some debt. I think many people find it easier to pay down debt if they can see some improvement in their savings.

How about a compromise? Set up a time period, say, 6 months to a year, and divide your debt by the number of months. This way, you’ll pay off the debt within a reasonable period of time with a combination of income and savings. Hopefully, you’ll be able to keep something of a savings cushion. And with time frame the interest burden or penalty won’t be that high..

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