- © Score More Credit
It's raining nowIf you are holding money in a savings account earning a low interest rate, apply it all immediately to the highest interest credit card. "But wait! Then I’ll have no money saved!” you'll say. However, while you have credit card debt at high interest rates, you have no business keeping extra cash on hand. If you are paying more interest in debt than you are earning on your savings, it's raining now. Consider that all money in a savings account earns a small amount of interest. You then pay income taxes on that interest, almost half of what you've earned. Ask yourself, am I making more money after taxes with these savings than I am paying in interest on my credit card? Most likely, the answer to that question is "no". Use the same analysis when you are deciding whether you should invest money or carry a credit card balance. If you are still concerned about having no money saved for the rainy day or retirement, consider this scenario. Imagine you have fallen on a financial hardship. No money is coming in. You have spent your savings account and liquidated your stocks. The mortgage payment is due. Where do you get the money? If you are like most, you answered, "I'd take a cash advance on my credit card." When the proverbial rainy day arrives, if your savings don't cover your costs, you'll turn to your credit cards anyway. Why pay interest now only to fall back on the cards again later? Shift your thinking. Remember the credit cycle, all dollars are borrowed. If you are saving money in lieu of paying off debt, you are borrowing from your debt reduction pool. Your cost? The difference between the interest you are paying and the interest you are earning on that same dollar (minus income taxes). From this day until you are out of bad debt and have developed a contingency fund, your open and available credit lines are your rainy day fund. |
| Resources | Blog | Support | Referral Login |