Which would you rather do in the next few months? Pay off your credit cards, or build interest on the money in your savings?
Most people will go for the latter option. Making more money on your savings appears like the most stable financial option. By making more from interest, you will be able to pay off your credit card faster later on.
Yet the only problem with this scenario is that you may end up paying more interest on your credit cards than what you will make in interest on your savings. This can result in you losing more money overall by postponing paying off your credit card bill.
Understand Your Credit & Savings Interest
Most financial planners will tell you upfront to get rid of all your credit card debt as quickly as possible. The main reason is that you could be paying high-interest on the debt that you are carrying on a monthly basis. Bank credit cards, as well as store credit cards, can have high rates from 15% going upwards to 29% APR.
On the flip side, big banks will normally offer an interest rate as low as 1% APY on the money that you have placed into your savings. While you may have more savings available, it is slowly being whittled away by the insanely high-interest bank credit card that isn't being paid off.
Look at this from another angle. Let's say your friend has about $15,000 in a savings account earning 1% APY. While this amount is a nice nest egg that is slowly building, she may be paying a $10,000 balance on a credit card that has an interest rate of 15%.
The 15% credit card interest that is owed completely wipes out the 1% savings interest that she is making. In addition, she still has to pay the other 14% in credit card interest, as she is only making minimum monthly payments.
Pay Off Your Credit Cards First
Never let credit card payments build up. Instead, completely pay off the amount to avoid carrying the large interest rate from one month to the next. While you don't want to see your savings get hit drastically, you also don't want the money to slowly disappear into your credit cards because you are paying the interest over a longer period of time.
Also, beware of the minimum amount that is allowed to be paid on your credit cards. If you only pay the minimum, it can take you decades to wipe out the balance that you owe, and you'll be paying even more in the end.
You always want to pay more than what is suggested for minimum credit card payments. One way to do this is to make multiple small payments throughout the month that will add up. Then you can significantly lower your debt and pay less interest. With a lower credit card balance, you'll be able to build up more of your savings.
Keeping your debt in control without damaging your savings is doable. Pay attention to the interest rates on each of your credit cards, and pay the highest rate balance off as quickly as possible.
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If you have questions on budgeting or need help reducing credit card debt, stop by or give us a call at 800-343-6328.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.