Does saving trump carrying a high credit card balance?

A reader has saved thousands, but still carries big 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 expert

Dear Credit Guy,
I have a balance on a credit card that is $14,000 with an APR of 9.99 percent. I pay the minimum required in order to pay myself every pay period. I have savings close to $70,000. However, I am very frugal when it comes to touching it because it took me so long to get there. So, I'm trying to decide if I should pay off the $14,000 in full, half, etc. I don't know what to do. I feel if I pay in full, I'm depleting my savings and will have to start over. Please help. -- Catherine

Answer for the expert

Dear Catherine,
I admire the discipline it took to save almost $70,000. You are to be congratulated. What troubles me is that you, just as many people, are somewhat contradictory in how you are managing your finances. You have managed to save a great deal of money -- I would imagine well beyond the six months to a year's worth of living expenses that I typically recommend for an emergency savings cushion. Yet, you have $14,000 in credit card debt. This seems inconsistent to me.

I'm curious as to how you ended up with $14,000 in credit card debt when you have managed your money so well that you were able to save so much. What I would encourage you to do is take a look at your monthly spending and be sure that you have allowed yourself enough income, minus your savings amount each pay period, to meet all your monthly obligations and spending. If you are using your credit cards to extend your income, you need to stop. Saving is important, but living within your means is more important.

As long as you are not currently adding to your credit card debt regularly, I am going to recommend a compromise between saving each pay period and paying down your credit card debt faster. Right now, you are paying $115.50 per month in interest charges on your $14,000 credit card debt. This amount goes down each month as you make payments, but with only a minimum payment each month, your interest costs will not decrease very quickly.

You seem reluctant to pay down your debt with accumulated savings, so let's work out a plan to pay off your debt in a reasonable amount of time, with a reduction in your savings plan while you are paying the debt. I don't know how much you are saving each pay period, so it is difficult to say by how much you will need to decrease your savings amount to repay the debt.

But I would like you to consider the following two options:

  • Pay approximately $200 more a month than the current minimum payment on your credit card balance for a monthly payment of $452, and you will pay off your debt in three years.
  • Or -- and this is the option I would recommend -- pay approximately $390 more each month for a monthly payment of $645 and be debt-free in two years.You can use the payoff calculator to explore other payment scenarios.

Even if you can't afford to make any savings contributions using one of the above options, I would recommend that try to do so. Once you have paid off the debt, you can once again begin saving. I would also suggest that you place about 15 percent of your current savings amount into a separate savings account to be used for emergency expenses. If you have to use any of those funds, replenish the smaller account first and then you can continue to add to the account with the bulk of your savings.

Take care of your credit!

See related: Best use for inheritance: pay debt or create savings?, 7 simple ways to create an emergency savings fund, Best use for inheritance: pay debt or create savings?, Need to pay off debt fast? Prepare to make sacrifices

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Updated: 12-18-2018