Pay Yourself or Pay Off the Credit Cards?

Cecil from Indiana called us with a question that many people have. He was an apartment dweller who wanted to buy his first home and he was saving up for a down payment. Unfortunately, as many people do, he had a large credit card balance that he was slowly paying down while at the same time he was trying to increase his savings account. What he wanted to know was, “Should I just pay the minimum on my credit card and put as much as I can in savings or should I try and pay off my debt?”

Almost without exception the logical answer will be to pay off your credit card instead of putting the money in savings!

In fact, if you already have enough money in savings, or perhaps received a recent windfall, use it to pay off your credit card debt! 

Let me give you an example as to why that is logical thing to do. Let’s say your credit card balance is $1,000 and you have $1,000 either in a savings account or available to you:

• The interest on your credit card will be between 12% and 22%. Simple math shows you’ll be paying $120 to $220 a year in interest and still not touching the principle.
• On the other hand, in today’s market you’ll be lucky to find a savings account that will give you 1% interest. If you do find such a deal you’ll be getting back a whopping $10 on your investment.

So your choice is between paying $120-$220 a year to a credit card company while you receive $10 from a bank, or paying off your credit card bill ASAP, get a clean financial slate and start paying yourself more money.

Which one seems more logical to you?  Here’s a hint, pay off your credit card debt!

But here’s the “but” to that logic: This logic doesn’t hold if you are one of those folks who believe a credit card is sad unless it has high balances and it’s your duty to make it happy. You have to be disciplined in your spending and you have to overcome those habits that got you in the situation in the first place.

As to the people who argue that using their savings would leave them short in the event they needed emergency cash I say, “Getting away from steep interest payments will allow you to rebuild your savings much quicker. Besides, in a worst case scenario you’ll have zero-balance credit card to draw on…just don’t use it unless you absolutely have to!”

So that’s the advice we gave Cecil. Pay off your debt, get a little bit ahead on your finances and then give us a call. Of course if he was already a homeowner we could have proposed several options for eliminating debt like a refinance, home equity loan or a reverse mortgage. After all, swapping a 22% interest payment for one that’s around 4% is always a good deal…it’s just logical.

Have a nice day.

Royal United Mortgage LLC offers a full array of lending solutions.  Home Mortgages, Refinances, Home Equity Loans or Reverse Mortgages (HECM), are all part of our financial solutions and we look forward to working with you to find the best one that will meet your short-term needs and achieve your long-term goals. To see how simple it can be, check out our video.

Dan from the Royal United Mortgage LLC team.