The credit card bill is coming due again and many Tennessee residents, low on funds, pay only the minimum payment. They may have a few thousand dollars in a saving account, but they don’t want to touch that because it’s earning interest. However, it’s important for credit card users to do the math and see how credit card interest compares to the interest they’re earning in their savings account. More than likely, they are earning much less in their savings account.
The average credit card interest rate is more than 15 percent. Meanwhile, most people earn less than one percent in interest on their savings account. On top of that, the interest earned in a savings account is taxed, while credit card interest is not tax deductible. So doesn’t it make sense to take some of the money from the savings account and pay down the credit card debt?
However, the trick is to use some of the money from savings, not all of it. Everyone should have some sort of financial cushion in case of unemployment, illness or some other emergency. It can be hard for many people to take anything out their savings account. There’s nothing like the feeling of being free of credit card debt and the sooner that is achieved, the better a person’s financial picture will be.
It’s easy for a credit card to keep a consumer in debt for decades. If a person has no savings, then he or she may resort to making just the minimum monthly payment. Although not the ideal situation, this will at least keep debt collectors at bay. When the debt is in the tens of thousands and seems to be growing every month, bankruptcy may be the best option.
Source: Daily Finance, “Should You Use Savings to Pay Off Your Credit Card Debt?,” Sally Herigstad, Jan. 24, 2014