Pay off Your Credit Cards or Save, That is the Question

Personal Finance

Having been in the financial world for many years, and with the ongoing recession, I’m often asked a popular question. “Should I pay off my credit cards or save”? That’s a very good question, especially considering that credit cards along with risky mortgage financing are one of the main turning factors of the economy. My buddy Steve sent this very same question not too long ago. He asked:

Steve: Joshua, I have a predicament and would like your opinion. I currently have two credit cards, both with high interest rates. I’m paying almost $70.00 a month in finance charges. I have savings but wanted to know if it’s a good idea to pay off the credit cards or continue saving?

I responded: Hello Steve, It’s highly recommended that you pay off your credit cards given that your circumstances allow you to. Meaning, if you feel secure in your job, and you can pay off your high interest credit cards without blowing through your whole savings, then it’s a smart thing to do. With the recent credit card reform laws, credit card companies are making credit lines less accessible, adding new fees, and increasing interest rates to compensate for the recent laws. I recommend that you retain at least 6-8 months of savings in case you were to get laid off, or you lose employment. One other realization to note is that saving rates are subsequently minimal it’s ridiculous. Keeping your money in a savings account earning one percent interest and dividends of a couple dollars doesn’t make good money sense, when you’re spending seventy dollars a month in credit card finance charges.

I was flipping through the channels the other night and came across “Suze Orman” Who also suggested the same thing. Credit card companies are so unpredictable, and you never know when you will get the change of terms in the mail. I want to stress again the importance of not spending your whole savings. Because if you were to lose employment, you would probably turn to using your credit card for living expenses, which could become a financial nightmare, ultimately having no savings and more credit card debt than what you started with. My hope is that the new credit card reform laws will continue to show credit card companies true intentions, making America wiser. Ideally, we should all be utilizing credit cards to increase our FICO scores and that’s it. Get a reward or cash back card and use it occasionally paying off the balance in full each month. I personally never spend more than $200.00 a month on my credit, and I make sure it’s paid in full every month. Don’t fall prey to the shyster ways of these mega companies; use them to your benefit.

If you’re lucky and are offered a GOOD promotional balance transfer, and you can’t afford to pay off your debt in full, in some instances it’s smart to move your balance to a card with a lower rate or even a fixed rate. Just be sure to check the fine print and make a goal to pay the card in full by the promotional expiry period. Always remember that nothing is set in stone with these companies, so make sure you pay on time, every time. I recommend setting up auto pay for the minimal payment and pay extra monthly manually. This should keep you out of default trouble. I hope these tips help. If you have something that has worked for you and you would like to share, please use the comment section below.