Use 0-percent promotions to create an emergency savings account

Use your cash wisely to pay debt while bolstering your financial health

By  |  Published: April 15, 2017

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 $2,500 and a balance on three different credit cards at no interest at this time – $1,900 on the first one (promotion expiring May 2018), on the second one I have $2,040 (promotion expiring March 2018), and $932 on the third one (promotion expiring November 2017). I want to pay something on all of them. What would you advise? – Leslie

Answer

Dear Leslie,
If I understood your question correctly, the three cards in question all have zero interest for a certain promotion period, with time left on each time frame varying between seven and 13 months. With a total debt of $4,872, it seems as if you’ve got enough money to retire about half of that debt now.

So, let’s talk about how you should go about paying this debt without incurring any interest or penalties – which I’m sure is your goal.

  • The first promotion period will end in about seven months. It also has the lowest balance due at this time. No matter what, you need to pay off that $932 within that time frame. Assuming you don’t throw any extra money at this card, you would need to pay about $135 every month for the next seven months to erase that debt without incurring any interest.
  • The second promotion period ends in about 11 months. Again, assuming you don’t throw any extra money at this account, you will need to pay about $186 every month to this card for the next 11 months.
  • The final promotion period will end in about 13 months, and would require a monthly payment of about $147 over those 13 months.

These three payments total about $468 a month. However, according to the payoff calculator available at CreditCards.com, you could pay $400 a month for the next 13 months, which is when your final promotion ends, and have your debt paid in full with no interest.

I know that your question was how to allocate the $2,500 you have now against your debt. Because your promotions are for zero interest, I think you might be better served to put that $2,500 in an emergency savings account, and pay the $400 each month to your creditors as outlined above.

  • Having emergency savings on hand is crucial to your overall financial health and is one of the hardest things for consumers to build. This would be a great start.
  • You should also plan to make regular deposits to your emergency fund until you have three to six months of living expenses banked.

What this means is that you are committing to not adding to your credit card balances during this time, at least not without taking those additions into account when you make your monthly payments. What I mean by that is that if you charge $100 one month, you will need to add the $100 charged to your total monthly payments to your cards for that month. Doing so will ensure that you pay your debt within the promotion period and pay no interest on your purchases.

Remember to always use your credit smarts!

Editor’s note: This is Susan Keating’s last column for CreditCards.com. We’d like to thank Susan for sharing her insights and advice on debt management with our readers, and wish her the very best in her future endeavors. Starting next week, Todd Ossenfort, The Credit Guy, returns to CreditCards.com to answer your questions about credit, counseling and debt issues. Ask him a question.

See related: The ABCs of credit card residual interest, Saving money versus paying off debt

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Updated: 10-23-2017

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