Shouldn't paying off credit cards take priority over savings?

Question

A friend of mine insists that saving money is more important than paying off credit cards. I advised her to take the money earmarked for savings and add it to her credit card payment. Her co-worker (a self-proclaimed financial expert) advises her that savings is most important but I'm not sure he knows about her debt situation. While I agree with her co-worker, the fact remains that paying off credit card debt at 14% takes priority over saving at 2%. The only exception I could think of was "emergency savings" which I do believe should take priority over credit card payments. Am I correct?

Answer 1

You are correct. Totally ridiculous to put money in an account at 2% and leave a balance at 14%--figure net loss on $1000 would be $12/month, not a good investment. Link is info from Kiplinger's.

Answer 2

You are correct that very few people will make an after tax return greater than the 12% or more than they pay in credit card interest.

But nobody should be saving at 2%, except possibly for a small emergency cash fund.

The problem with credit and savings is too many people will keep running up debt and never save. If you are young and start putting money into a 401K or IRA, you can amass quite a bit of money by the time your are 65.

However, if you throw every cent at debt, you might just wind up with a pile of receipts. So my opinion is that your should fully fund a retirement plan, even if you have debt, especially if the employer is paying matching contributions.

That money should be invested, at the very least, in index funds. The US stock market has exhibited a historic long term return of 10% per year.

Any extra money can be used to pay down debt.

Answer 3

You are absolutely right.... You would have to be mentally handicapped mathematically to NOT see that 2% of savings is getting you no where if you are paying 14% in interest on the credit card.

Even an emergency fund I would over look till the credit cards are paid off for if an emergency arises you could simply use a low interest credit card for that emergency.

Pay off ALL credit cards before ANYTHING ELSE !!! UNLESS they are "no interest cards". Then keep paying OVER the minimum and save at the same time.

The sooner people figure this out... the sooner their lives will be better financially. One word of advice....NEVER take financial advice from someone dumber or poorer than you. You have nothing to gain from advice from an idiot.

Happy Tuesday !!

Answer 4

Yes you are. Put it to your friend this way...nothing she has purchased with credit is actually HERS. Technically she doesn't OWN any of it because it hasn't been paid for yet, and won't be until she has a zero credit balance. If she loses her job, or (god forbid) her ability to earn a living through injury or illness, whatever money she HAS managed to save will be garnished by the collection agencies to pay of her debt to the credit card companies, so she will have no savings either, which she would have needed to pay for rent/mortgate, utilities, food, etc...

I know that I just described a "worst case scenario, but it happens to people ALL THE TIME. A good percentage of people are living ONE paycheck away from homelessness. Creditors do not care what you life situation is...they want their money and the legal system will back them every step of the way. When it comes to collecting money...their ruthlessness is second only to the IRS!

Answer 5

You are correct. The interest on credit card debt exceeds what a person would earn saving there money. Simply put pay off the debt then save your money. Life requires goals and a game plan.

Answer 6

It really depends on what your friend is paying in the way of finance charges. She may have 0% APR on her credit cards and 2% on her savings. In that case, it would make sense to continue paying the credit cards down slowly at 0%, and earning money on the savings at 2%.

If she is paying 14% on credit card debt and only 2% on savings then it's an obvious mistake.


Learn about credit http://www.thetruthaboutcreditcards.com

Answer 7

it depends on what your interest rate is on your credit cards, if it is high, like 18%, there is no sense in trying to invest, becasue when you invest, on average, you make 10% a year. so it would be best to pay off the credit cards and when you get that under control, only use it for emergencys and nothing else, and then get set up to invest money each month into a good mutual fund or roth ira account. call vangauard and they can get you set up to start an investment account, just a few papers to complete, it is very easy. but there is no sense in saving when you have high balances on credit cards with high interest rates. now if you interest rate is low, that is a different story.

Answer 8

If you do not get the house try this. pay off one of the credit card and take the money you were spending on it to build up a small emergency fund of about $1,000 so that if some thing bad happens you will not have to use a credit card . when you have the 1.000 save then use the anount you out aside each month for that and add it to the other credit card balance. when they are paid off build up your savings with the payment money

Answer 9

Emergency savings does take precedence over credit card payments, but other than that pay down the highest interest card first and go to the others second. Plus, change the saving location. I know that emigrant direct is giving 5.05% for savings. So drop the 2% and go to the 5.05% rating.

Answer 10

The problem is that most people who try to pay off their credit cards end up just putting more back on anyway. If they can't handle the credit then cut them up. Only pay in cash. Pay off the credit cards first and then setup an ING account. It pays over 4%.