Pay down card debt, if you can, before retirement

If you have ample savings, you will come out ahead in the long run

By  |  Published: December 24, 2016

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I have a small amount of savings that could help pay off a large portion of my credit card debt. I’m undecided whether I should retire and pay down my debt or keep the savings and continue working to pay off the debt. – Wendy

Answer

Dear Wendy,
Unfortunately, you are in a situation that faces many seniors today as they grapple with the prospect of carrying high-interest credit card debt into retirement. Looking at the cost of credit card debt, it is easy to understand the problem, but it’s not as easy to find the right solution.

I would encourage all of my readers, retirement age or not, to take a hard look at their credit card debt with an eye toward paying off what’s owed in the foreseeable future. Those little boxes on the credit card statements tell a frightening story for many, especially when cardholders see what it costs to simply pay the minimums each month with no plan for paying off the cards completely. 

It is difficult for me to judge what you consider “small” and “large” in your question. If the small savings you have is enough to pay off a large amount of your debt, I think you might want to seriously considering doing that. But I do have a couple of caveats to that advice. 

First, I am assuming that the savings you have is liquid and not tied up in a 401(k) or something similar. I am not a fan of using tomorrow’s income to pay off today’s debt if it means you are giving up considerable interest-bearing cash for your retirement. Raiding your retirement fund to pay off debt is a bad idea. Keep in mind that many financial planners suggest that seniors prepare to have investments that will provide for a 30-year retirement. You may want to visit with a qualified retirement specialist to see if your nest egg is large enough for retirement. 

However, if this money is simply sitting in a standard savings account, you will come out better in the long run to pay off as much as you can of that high-interest debt with those funds. What you are earning in interest on that kind of savings is negligible, especially compared to the interest being charged on your credit cards. 

As of December 2016, the average credit card interest rate being paid out by a person carrying credit was 13.76 percent, according to the Federal Reserve. As of the same date, the interest rate being paid to a person with a savings account was a measly 0.06 percent, according the Infographic: The face of senior card debt, 5 tips for talking to elderly parents about credit card debt

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Updated: 10-23-2017

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