I have a credit card that has a balance of $6,800 with 3.99% for life. I have a savings account with $6,000 that earns 5.02% The credit card minimum is about $120. I pay $250 each month. Should I pay-off the credit card or continue paying the $250 and puting money in my savings account? The interest on the credit card is only about $2 dollars more than the interest earned in the savings account.
Categories
10 Comments
I’d throw 200 a month at the credit card and 50 a month into savings.
That way if you come across a finacial problem down the road you have savings to pull out of instead of the credit card (Cash advances are a considerably higher interest)
Besides you’ll be increasing your credit score by paying off the card.
pay off credit card, then start putting money into your savings
Your after tax return on the savings account is much smaller than the 5.02% nominal interest rate. Suppose, for example, the combined federal and state tax rate on the interest is 30%. Then you end up keeping only 70% of the interest income, which makes your effective return 3.514%. That’s less than the 3.99% the credit card company is charging you to borrow, so you would be somewhat better off to pay off the balance.
If you only pay 20% taxes on the savings account, it’s pretty much a wash whether you pay off the credit card or not. Your after tax profit on the savings account is 4.016%.
If you are fortunate enough to pay less than 20% state and federal taxes, you would be better off keeping the money in savings and paying only the minimum on the credit card.
There are other factors beside just the bare-bones after tax profit calculation. If you are absent-minded enough be in any danger of forgetting make a credit card payment, you should definitely pay it off as soon as you can. Even one missed payment would cause you to get hit with punitive penalties and higher interest rates. On the other hand, if you have a high enough salary to be able to make the credit card payments from current income and haven’t already funded a Roth IRA for this year, you should seriously consider using the money from the savings account to do so. That would eliminate the taxes on your investment and tip the calculations in favor of not paying off the credit card.
I’d pay off the credit card and then never use it again.
Honestly, I’d say pay off the debt. But that’s just my wiring. You can make a good mathematical case for saving the money at a higher rate. But I’d rather have $0 and owe $0 on a card I could use again if I wanted than have $6,800 that I can’t really use because I owe $6,800 on a card. Further, once you pay off the card, you can put all that money and more into savings and build up your reserves VERY quickly.
On the face of it, it looks like you should continue saving because 5.02% is higher than 3.99%, but that’s not exactly true. You have to pay income tax on the 5.02%, but the 3.99% is not tax deductible. If you’re in the 25% tax bracket, you only get to keep 75% of the interest earned on the savings account (5.02% * 75% = 3.77%).
So in short, the figures are so close, you should do whatever makes you feel better psychologically. If you like having savings, continue to save. If you’d like not owing anything on your credit card, pay it off.
I recommend that you keep the money in the savings account. This is due to and conditioned upon a few things:
First, ALWAYS pay attention to the interest RATE and NOT the amount of interest you have to pay. Second, it is rare these days to find loans with the interest rate of 3.99. Third, a caveat: Does your credit card company have any other requirements like a minimum amount that you have to charge to the credit card every month and pay the “regular” interest rate on those purchases? If so, then paying off the credit card may be beneficial. I am saying this because the “regular” interest rate applied to the other purchases will cost you far more (the credit card company will apply your monthly payment to the 3.99 percent loan first).
You dont want to use all of your savings on the credit card but I would pay it down as much as you can leaving some savings for emergencies. You will never get that credit card interest back but when that bill is paid off you can put that much more in your savings. That interest you get to keep.
pay off the credit card. If you miss one payment or are late you will be whacke with upwards of $35.00 late fee (which negates any and all gains you’ve made) and that great rate can and will go up to a default rate that’s a lot higher. Credit card companies are evil.
pay off the credit card, if u dun, it’ll build up and the company will charge u diff. kinds of fees such as late fee and such. not only that, if u dun pay the credit card, it can affect ur credit score. the sooner u pay it off and show the company that u are paying it off..the sooner ur credit score will go up