Payoff Debt? Save?

Question

I have $5000 in credit card debt at 13% interest (the credit card is closed so I cannot ever charge more on it). I also have $5000 in savings. I have a steady job that provides me, after expenses, roughly $500 a month to save.

Should I payoff my debt, be at a zero balance in the bank, and work from there? I am afraid that the moment I do, expenses will come up - medical, car repairs, etc.

I like the "security" that having the savings provides. It makes me feel better knowing in case something happens, I am covered - because I do not have the best of credit so I could not "charge" any unforseen expenses. But I also do not like paying 50 bucks a month to Discover card when that money could be used to save.

Any suggestions?

Answer 1

Payoff your credit card debt. If an unforseen expense comes along, then you can use your credit card if you have to. This way any money you save will be earning you positive interest rather than negative interest from your card. Remember, 13% is fairly hard to get when saving your money, you will save a lot by not paying interest every month to your credit card.

Example:
If you put your $500/month towards your credit card you could in theory have it paid down in 10 months, but since you also have to pay interest on it, you will need another $650 to completely pay it off (translates into another 6 weeks). This plan would take 11.5 months and would give you $0 owing on credit card and your $5250 which you have saved already (assuming 5% interest earned on savings). Net $5250

Whereas if you completely paid it off and started saving that $500/month, after 11.5 months you would have $5750 + $250 from the interest (assuming 5% again) you would have earned putting you at roughly $6000 in savings and $0 on credit card. Net $6000. See the difference. Hope this helps.

Answer 2

Take the additional $500 and pay down the CC! Don't use your savings unless you plan on putting the $500 a month back into savings! Even at $500 a month, you will still incurr interest.

You could also put $2500 on the CC and pay the remainder of the balance off with as much money as possible to erase the debt. That way you at least have a small amount open on the CC for emergencies over the $2500 in your savings if needed!

Just don't charge anything new unless it's an absolute emergency. It's a discipline.

Good luck.

Answer 3

You could call the credit card company or collection agency and see if they will settle the debt for less - say $3000 - if you pay the whole $3,000 at once. Then you will have paid the debt in full and still have money in savings. I understand you like the sense of security, but with this debt hanging over your head you will never really be ahead. And if you pay off your debt and gradually increase your credit, you will soon have no problems getting a loan if you needed to.

Answer 4

Unless the interest rate on your savings account is over 13%, you're losing money every month that you have the credit card debt. You're better off getting rid of the credit card debt, and then turning the $$ around that you were paying there and putting it back into savings.

If you're worried about having no safety net, what about paying off half of the credit card debt (which will still leave you with $2,500 in savings) and then taking an aggressive approach to paying off the rest of the debt?

Answer 5

Okay, here's my two cents. It's good you have an emergency account. Don't touch it unless you have an emergency. Now your goal should be to accumulate wealth. Use part of the 500 to pay off your credit card and part to invest in mutual funds. If your credit isn't the best then it will look better after you've established a history of making payments on time for a long time. You'll be making a good dent in that CC balance and eventually you'll pay it off. It's more important that you take care of yourself than you take care of the CC company. Sounds to me like you're doing just fine. Any decision you make will probably be a good one.

Answer 6

Pay off that credit card. All of it. You will save more money because you wont give 13% of it to the credit card company. This is your money. They don't do anything for you.

If something does happen to you, medical cost arise, then your credit card will be paid off and you can charge extraordinary expenses. But if nothing happens to you, 1) you credit score will rise and 2) you can start saving all of your money.

Answer 7

How much are you paying in interest each month on your $5,000 credit card debt??

Every financial guru I've heard of always says the first thing is to PAY OFF YOUR CREDIT CARD DEBT!!

That's the smartest move.

Answer 8

Consider using simple terms, Credit card is costing $650.00 a year times 4 years to pay off cost is $2,600. total payment is $7,600.
Savings account at 1% interest is $50.00 times 4 years you earn .$200.00
Take $7,600 minus $200 Total 4 year expense $7,400.
If you paid off credit card Save the $50.00 a month for 4 years, you will save $2712.00.
REMEMBER this is figured at simple interest not compounded.
Should you pay off the credit card in full
.
You will have a gross GAIN of $2,712.00 not a
net LOSS of $7,400.00
Again figured in simple term not APR or compounded.
When you figure in the $500.00 of savings per month, you would have $12,292.00 in savings and owe Discover $0.00

Answer 9

I would use the additional money to pay the debt, it's always good to have a financial cushion with the saving account!!!

Answer 10

mastercard debt as owed by ability of maximum individuals is what i could call a bad debt. the only exception is that in case you're making an investment in some thing that provides you a cost of return greater advantageous than you would be charged in this mastercard - and in case you're letting funds sit down in a mark downs account, the respond is maximum actual, no way Jose! considering the fact that mastercard debt is largely unsecured, or no longer sponsored by ability of sources, the fees the banks value are the utmost in evaluation to declare, for a private loan(against the protection of the abode). IMHO it makes a large style of expertise to pay off this debt formerly the activity provides on like loopy. in this occasion, additionally verify what your APR is - it particularly is how lots the activity accrues over a 365 days, if left unpaid - this may well be greater advantageous than the headline parent they quote. i will understand your undertaking to have some liquid funds interior the economic business enterprise. returned, in case you avert paying off the money owed in favour of preserving funds on your mark downs account, say in 5 years time, you will have paid greater activity than you're able to have had to otherwise. the terrific answer i will see is - pay off the customary public of the debt as quickly as a danger. you have reported the mastercard is closed, does that mean whether you pay debt off, you will no longer get yet another credit line returned? i believe no longer. In effect, in case you fall wanting money in say a 365 days's time (god forbid!) could you no longer be waiting to, interior the worst case undertaking, borrow returned on a mastercard? If working example, you pay $3000 of your debt with mark downs, you nevertheless have $2000 stacked away for a wet day. Now, in case you aggressively pay off the debt, you will with a bit of luck be clean of your debt interior of 0.5 a 365 days or paying off reasonably, a 365 days, tops. as quickly as the debt is paid off, with a bit of luck you will proceed to maintain on a similar value or greater powerful, and could no longer ought to stand a unfavourable stability. solid success!