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Question for the Money Doctors

Question submitted on Jun 19, 2013.

Question

I want to get rid of my credit card debt and was thinking of taking some money out of savings to do so. I have about $3,800 in savings and about $2,200 in credit card debt. Is this a good idea?

Answer

It sounds like a good idea, but let's look at this further. Credit cards tend to charge high interest rates while savings account pay low interest rates. According to Bankrate.com, credit cards charge 16% and savings account pay less than 1%. Assuming these numbers reflect your situation, you could save over $300 per year by paying off your credit card. So, it makes sense and cents. After paying off your credit card, you’ll still have $1,600 in savings to face unexpected expenses. You may want to keep the credit card (rather than get rid of it) for emergencies. If you use it, budget to pay it off each month. Better yet, with online access, it’s easy to pay the balance weekly and avoid end-of-month surprises. After paying off your credit card, you’ll likely feel empowered to tackle another financial challenge. If so, look at what you need to save to build a comfortable safety net and a retirement nest-egg. Congratulations on being able to pay off your credit cards!


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