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Paying off Credit
Conflicting economic advice is always hard to decipher but choosing to use your savings account to pay off your high-interest credit cards just makes sense.
Virtually every economic guru in the world will tell you that the best way to start saving money is to pay off high interest credit cards, so what if you are carrying a balance on a high interest credit card and have money earning money for you in a savings account. Should you pay off the credit card with your savings?
Rarely in finance will you get a straight answer as often people want to hedge their bets or point out that the answer depends on your specific situation, but in this case, that is hogwash. Pay off the high interest credit cards.
Looking at any major or minor financial institution right now will make one thing clear: Money in savings accounts isn’t earning much. In February, 2009, $2,000 is a U.S. Bank savings account yielded less than $1 in interest. Money markets and certificates of deposit are a little better, but not much.The average high interest credit card is charging something like 38 percent interest.
So the decision is simple. Take money out of the savings account and pay down the balance on your high interest credit card unless you can get the card balance transferred to a lower interest card. However, do not immediately cancel that card. First, if you have used a large portion of your savings to pay it off so you may actually need it sometime soon. Keep it and don’t use it.
Second, we all should know by now that your credit score is at least partially determined by the way you use the credit that is available to you. By paying down the high interest card, you are effectively creating more credit available to yourself and raising that credit score.
Credit card interest, even on good cards, is typically much higher than the rate of return on savings right now, so keeping money in the bank while you still owe a debt is not a good idea. However, this will not always be the case so take a minute to figure out how to decide in the future whether to save money or pay off your bills.
Ultimately, the question comes down to what it costs you or saves you to pay the bill on time or late. If, for instance, you have a revolving charge account that does not charge you any interest at all until the 31st day, then paying as close to that day without ever being late is in your best interest. Likewise, a utility bill or other payment which does not charge interest should be paid just in time to keep it from being late.
Otherwise, if there is an interest fee on the debt, compare it directly to the interest on your savings. If the money is making more in savings than you are accumulating in interest on the debt, keep the money in the savings account. If it is accumulating debt rather than you earn interest on savings, pay the bill.