Should I keep my large checking account balance or pay my credit cards?
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Dear credible money coach,
I have about $ 5,000 in credit card debt at 21% interest. But I have $ 14,000 in a checking account that doesn’t earn any interest. Would it be better to just pay off credit card balances? My credit score is below 720. – Carolyn
Hello Carolyn and thank you for your question. Congratulations on saving a lot of money!
To answer your question, let’s look at how many emergency savings you need and how much you could save by paying off your credit card.
If you already have at least six to 12 months of running expenses, then using your money to pay off high interest debt is a wise financial move. However, if you don’t, maintaining a healthy cash reserve should be your top priority.
But suppose your emergency savings are in good shape. From your question, you already realize that keeping a large balance in a checking account is rarely the best option because it does not allow your money to grow.
Now consider how much your credit card debt costs you interest.
The cost of $ 5,000 in credit card debt
Credit card companies typically set minimum payment amounts at 2% to 4% of your balance. Suppose your minimum payment is 4% of your $ 5,000 balance. Your minimum monthly payment would be around $ 200.
By paying only the minimum on the card, it would take you around 34 months (around 3 years!) To pay off the debt. All of this, of course, assumes that your interest rate stays at 21% and that you don’t accumulate any additional debt on the card.
Consider this for your $ 14,000
As I mentioned, if you have enough emergency funds to cover six to 12 months of living expenses, write a check for $ 5,000 to repay your credit cards might be a good idea. Here are a few options for getting your $ 9,000 balance to earn interest or higher returns:
- Transfer it to a high yield savings account
- Open a certificate of deposit (CD)
- Contribute to a retirement account, like an IRA
- Contribute to a 529 savings plan for college expenses for you or a child
- Contribute to a health savings account if you have an HSA-eligible health plan
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About the Author: Laura Adams is an expert in personal finance and small business, award-winning author and host of money girl, a top rated weekly audio podcast and blog. She is frequently cited in the national media and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her work as a speaker, spokesperson and advocate. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.