Emergency fund, retirement come before credit card debt

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
My balances on two credit cards are $4,000 (at 14.99 percent APR) and $13,000 (at 12.99 percent APR). My question is should I pay the $4,000 off immediately to avoid more interest, if I can afford it?  -- Will

Answer for the CreditCards.com expert

Dear Will,
On the surface, your question seems simple. YES!! By all means, pay it off if you can. However, as with most things in life, the situation may not be quite that simple. Let me explain.

I recommend that you consider several other factors before you make the decision to pay off that $4,000 debt. First, do you have an emergency savings cushion? Why not?  I don't know how you accumulated $17,000 in credit card debt, but I am confident that a savings cushion could have prevented some of it. So, if you do not currently have a savings cushion, I would suggest that you put at least a fourth of the money that you have to pay down your debt into savings. Moving forward, try to deposit something in that savings account each pay period, even if it is only $25. Pay yourself first! Your goal is to save at least three to six months of living expenses.

I know that with the interest charges you are likely paying on your credit card debt that it may seem counterproductive to put money in savings and earning much less interest than what you are paying to your creditors. However, if you have an unexpected expense rear its ugly head, which we both know happens more often than anyone would like, wouldn't you rather pay for the expense with cash instead of credit? That way, you are not only avoiding paying the creditor high interest rates, but you are avoiding the psychological toll it takes to pay off a debt.

Second, are you making regular contributions to a retirement plan? If not, I recommend that you do so. Compounding interest is a great thing, but you can't begin compounding interest today on money you plan to contribute later. Time is not on your side when it comes to retirement saving. The sooner you start the better. When considering how much you can afford to pay on your debt, take saving for retirement into consideration when you calculate the amount.

Third, I'd like you to give some thought to any secured loans you may have and whether it would make sense to pay down or pay off one of them. Your credit card debt is unsecured. The debt is not secured by a home, car or other property that you could lose if you had a major financial setback and were unable to pay your bills. Trust me, I see it everyday and no one ever thinks it will happen to them.  For example, if you currently have a car loan with $4,000 left on the note, it might be a wiser use of your money to pay off the secured loan first. That way you are protecting a valuable asset in case of an unexpected emergency.

Finally, if paying down your credit card debt makes the most sense after considering all the above, I'd pay off the credit card balance of $4,000 and use the extra money you will now have by eliminating that payment to start chipping away at the $13,000 balance. Accelerate those payments. Remember, there are two kinds of people in this world: those who pay interest and those who earn interest. Which one do you want to be?

I want to congratulate you on moving toward paying off your debt as quickly as possible.

Take care of your credit!

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Updated: 01-23-2018