Everyone agrees that it’s a good idea to get rid of credit card debt. In fact, many people scrimp and save to find more money to pay towards their credit card debt. What everyone doesn’t agree about, however, is the idea of taking money from a savings account to pay off credit card debt.
Some folks think that you should always opt to pay off your debts as quickly as possible. Others prefer the idea of building a solid savings account before you turn your attention to paying down debt. The best practice, though, is somewhere between these two ends of the money management spectrum.
If you have enough money in your savings account to comfortably pay off your credit card debt, you should. Interest rates charged by credit card companies are almost always higher than the interest rates your savings account is earning. Keeping money in your savings rather than eliminating those credit card debts is costing you money every month.
Please note, though, that I said you should have enough money to comfortably pay off your credit card debt. It’s not a good idea to scrape together every dime you have (emptying your savings account completely) and send it off to your credit card company. What will you do if you have an emergency and no savings account? You know what you’ll do; you’ll use your credit card to pay for the unexpected expenses. You’ll also end up back in the land of credit card debt.
The best thing to do is to set aside some of your savings and leave it safely in your savings account. You’ll have to decide what is a good amount for you. For our family we have decided that 6 months of living expenses is what we need to keep in our emergency fund. Your amount may be less than that, or it may be greater. You’ll need to make an assessment of what possible expenses you could incur in the future that you wouldn’t have enough cash to cover like unexpected car repairs, medical expenses, dental expenses, etc.
After you have determined what is an acceptable amount in your savings account, set that amount aside and put the rest of the money towards your debt. You will still have the savings account to serve as a cushion in any financial emergencies, and you’ll be able to eliminate your credit card debt. Once you’ve paid off all of your credit card debt, you can focus on rebuilding your savings account to a healthier amount.
What I’m reading:
Beating Broke’s Guide to Your Credit Score - A free guide that walks you step by step through your credit score including how your FICO score is calculated and what you can do to improve your score. Did I mention it’s free? 
Don’t Count Your Money ‘Til It’s There - This article illustrates the fact that “automated payments” can sometimes “not” be a good thing. Thankfully, she was able to remedy the situation before major damage ensued. We are on a semi-automated mode ourselves; we’re just not comfortable turning everything over without any intervention from us.
{ 6 comments… read them below or add one }
I think its a bit down to a person tolerance to risk too. Some people like risk and some don’t. Some will be happy to live from week to week just to pay off their past credit card indiscresions while others need at least a 6 month “buffer” before they even consider paying off their debt. It pretty much depends on the person I think.
I think you should pay yourself first.
Get out of debt as fast as you can, but pay yourself first.
I definitely think you’ve got to have an emergency fund, but it doesn’t make any sense to save anything beyond that when you are paying 10, 15, or even 20 or 30 percent on your credit card debt. The e fund is a must have though, for the just in case.
Thanks for the link too!
It’s always great to get everyone’s perspective on what their comfort level is with how much of a cushion they’d like to have in savings. I like to have a small cushion while paying off my other debt.
my husband and I are grappling with this very issue at the moment. I want to pay off more of the credit card but he wants to pay off less. We’re trying to weigh the pros and cons of either decision if either of us got laid off from our jobs.
I definitely agree that you should have an emergency fund before paying off debt, but I would lean towards less than 6 months. Dave Ramsey says $1000, and while I think that is a little low I would be closer to that number. Most emergencies that aren’t covered by insurance will probably be less than that.