Should You Use Savings to Pay Off Your Credit Card Debt?

Your credit card bill is due, and you don't have quite enough money in checking to pay the balance. Or you're trying to pay off your credit card balances, but it's like pushing a car uphill.

It looks like you'll be making the minimum payment again. If only you had more money.

Perhaps you do. If you have a savings account or other account on one hand and high-interest credit card debt on the other, consider using a portion of your savings to pay off your credit card debt.

It's not such a bad idea. If you think you're getting ahead by putting money into a bank account while you continue to pay high consumer interest rates on credit card balances, you're only fooling yourself.

The numbers don't lie
Say you have a credit card balance, on which you're paying the average rate of 15.38%. At the same time, you having a regular savings account at the bank on which you're earning a whopping one-quarter of a percent.

What makes it even worse? You pay tax on that miserable 0.25% you get on your savings account, but you can't deduct credit card interest on a personal account. (On business accounts, you can at least deduct the interest, if that's some comfort.)

Ready for more bad news? Inflation may not be high right now, but it's not zero. The real value of your bank account after inflation is lower at the end of the year than at the beginning.

For every month you keep excess money in a savings account while paying high interest rates on debt, you lose. All other factors being equal, your net worth -- the value of your assets minus your debts -- is going down.

Some people don't want to spend their savings on paying off debt. I hate to break it to them, but that money's already spent. They spent it at the cash register. Paying the balance now is really just transferring money from one account to another.

Tax-free return of 12% to 33% on a sure-fire investment
If I said you could get a 12 to 33% tax-free return, with absolutely no risk, you'd think I was crazy. You might even report me.

That's the return you get by paying off high-interest debt. You might even save more if you have a tendency to bump up against your credit limits and pay over-limit fees from time to time.

Few things can improve your total financial picture like paying off your credit card balances and keeping them paid off.

Psychological bonus
There's one more reason you should pay off your credit card balances and keep them paid off, even if you have to use savings to do so.

Taking money out of savings is hard, even painful. I hate having to take money out of savings after working so hard to put it there. I tend to remember that painful experience the next time I'm wheeling through a discount store and all kinds of knick-knacks want to jump in my cart.

Paying the minimum amount doesn't deliver the same message. It's just too easy.

Don't get carried away
Don't clean out all your savings accounts to pay off credit card debt, however. Savings accounts are not just for earning interest. You absolutely must keep enough cash set aside for emergencies, such as car repairs, illness, or even unemployment.

Part of your emergency fund may be available credit -- the difference between your balance and your credit limit. However, it's not a substitute for cash set aside. For one thing, the bank can cancel a card or reduce the limit, and then what will you do? A bigger problem is that when you have an emergency, you don't want to go further into debt.

And if you've been eyeing those retirement accounts? Step away. Retirement accounts are for retirement. Find some other way to pay off your credit card balances.

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Sally Herigstad

Sally is a new Fool contributor for 2014, but a long-time personal finance writer, columnist, and certified public accountant. Sally wrote "Help! I Can't Pay My Bills" for St. Martin's Griffin.

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