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Got financial questions? We’ve got you covered! Every Monday, we’ll address one of your burning personal finance queries by reaching out to several money experts for their opinions. If you have a general financial question or concern, or just want to chat about anything PeFi-related, drop it in the comments or shoot me an email at [email protected].
This week’s question comes from jpomonkey, who asks:
I have $2000 in credit card debt at 6.9% interest and $4000 in savings. Should I pay off the credit card debt in full, or keep making monthly payments while building my savings further? I own a home and want to keep extra cash on hand for any emergencies, like repairs.
Here’s what financial experts generally have to say about this common dilemma—remember, for personalized advice, it’s best to consult a financial planner.
Make Temporary Sacrifices for Long-Term Gain
“Given your current debt and savings, I wouldn’t advise using your savings to completely pay off your credit card balance,” says Patricia Stallworth, a money coach from Atlanta and host of the Minding Your Money 360 podcast. “That would significantly deplete your savings and leave you exposed in case of an emergency.”
Instead, Stallworth recommends halting credit card usage until your debt is under control and paying more than the minimum monthly payment. She also suggests finding ways to increase your cash flow, whether by taking on additional side work or cutting back on spending for a few months.
“With this strategy, paying $200 per month could wipe out the debt in less than a year,” she says. “You have a chance to pay off your debt and keep your savings intact, but it will require focus and commitment.”
At 6.9%, the interest rate is relatively low (the national average is over 16%), and the $2,000 debt is manageable. With that in mind, Ilene Davis, a certified financial planner, recommends a similar strategy to Stallworth’s, but with a more aggressive approach to paying down the debt.
“My advice to this client would be to avoid purchasing anything that isn’t absolutely essential until the debt is cleared, and then allocate $150 a week toward paying it off before spending on anything besides bills and necessities,” says Davis. “The debt would be gone in four months, and if this person is smart, they’ll invest at least $100 of that $150 to begin building wealth, while still having $50 per week to enjoy on more discretionary items.”
Clearing your credit card debt will free up available credit, which could be useful for any unexpected home repairs or emergencies down the line.
