Paying off a credit card debt
Question: I have a credit card with an outstanding balance of $1,646. I try to make monthly payments around $100, but I often forget and do it a couple of days late. This amounts to a $35 late fee – not to mention the finance charges and charges for overdraft transfers to my checking account which doesn’t happen often, but occasionally.
I have $1,715 in my savings account – which I have squirreled away for a couple of years. I was wondering if it would be a good idea to try to pay off the credit card with my savings simply because I cannot seem to get the credit card balance to go down even though I never use it. (Thanks to late fees, finance charges, etc. the balance seems to stay where it is despite the $100 payments.)
I deposit $75 into my savings every month, I could try to build it back up quickly.
What do you think? Thank you! Maria, Austin, MN
**Answer: **Here’s what I think is the trick to making this strategy work. Before you tap into savings to pay off the credit card debt you want to be sure you won’t run up debt again. Far too often people end up on a debt roller coaster, running down savings to get rid of it, allowing the balance to start growing, forced to start working off the debt all over again.
In other words, the more confident you are that your current spending and budgeting habits will keep you out of credit card debt the smarter it’s to tap into savings to pay down the bill quickly–and vice versa. In your case, it seems that you have your spending under control.
I’d consider handling the debt with a financial compromise. You’ve worked hard to build up the savings. Instead of draining your savings and eliminating the bill all at once, how about reducing it significantly but still keep some of your savings intact. This way if you’re hit by an unexpected bill you won’t have to whip out the credit card to pay it.
Finally, put in your calendar a recurring reminder to put money toward your credit card bill, say, on the 25th of every month (at least until it’s paid off). You’re working hard to set savings aside and you want to avoid those $35 charges. And when the bill is paid off in full follow through on your idea to rebuild your savings as quickly as possible. Good luck.