Credit card debt is the most expensive form of debt, and it's only getting pricier.

If seeing a credit card balance hover over your monthly statements makes you want to double down on your debt repayment plan, you're on the right track. Putting every last cent possible toward your credit card balance could save you hundreds, or even thousands, of dollars, along with cutting years off your debt repayment timeline.

But should you put every last cent toward your credit card debt, including your entire savings?

savings bank vault open and empty

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Emergency savings: how much is enough?

How much do you need to save? Conventional wisdom suggests that you have an emergency savings account that contains three to six months' worth of your necessary monthly expenses. However, if you're paying off high-interest debt, you can put most of that savings toward your credit card bill. 

It's smart to keep at least one month's living expenses, or $1,000 -- whichever is higher -- in your emergency savings account if you're paying off credit card debt. About a third of Americans said they would have to go into debt over a $1,000 emergency. Having that monetary cushion in your bank account means you don't have to turn to credit cards.

The case for draining your emergency savings fund

If you're making a decision based on mathematics alone, then draining that final $1,000 and putting it toward your credit card debt will save you more money in most situations. By lowering your overall balance by an additional $1,000, you're likely saving hundreds.

According to our credit card debt calculator, if you have a $10,000 balance with an APR of 16.93% (the national average as of May 2018) and are making $300 monthly payments, it will cost you a total of $3,607 in interest fees, and the balance will be paid off in 3.8 years. If you put that extra $1,000 toward your balance and bringing it down to $9,000, you'll end up paying $2,785 in interest, and your credit card will be fully paid off in 3.3 years. You'll end up saving more than $800 by draining your emergency savings fund -- assuming no other emergencies occur.

In short, emergencies are only potential, while interest on your credit card debt is guaranteed.

What if an emergency does occur, and you don't have the money to pay for it?

In most cases, you can put that emergency expense on your credit card. While it's not ideal to bring your balance back up after working hard to pay it off, adding another $1,000 to your credit card debt will simply put you back where you would have been if you hadn't drained your savings to pay off your credit cards.

There are plenty of situations, however, in which a financial emergency may be more difficult to resolve. Most of these involve one of the following circumstances:

  • You don't have access to your credit card.
  • You can't pay for the emergency with your credit card.
  • Your finances spiral out of control.

There are a few ways you could lose access to your credit card. It may be unexpectedly frozen due to credit card fraud. If you've defaulted on the account before, it may have actually been closed, in which case you must continue to pay off the balance but don't have any remaining credit. If you don't have access to a credit card, an emergency fund becomes even more necessary.

There are also some emergency expenses that require cash. If your car is involuntarily towed or impounded, the tow company may not accept credit cards. Landlords and mortgage payments cannot always be made with credit cards, and if they can, there is typically a sizable fee involved. While you can get a cash advance if you're really desperate, this will incur additional fees and even more expensive interest rates.

If you're living paycheck-to-paycheck, even the smallest unforeseen expenses can become financial emergencies. If you're not careful, your finances can quickly spiral out of control. On the flip side, even the smallest amount of extra cash in an emergency fund can turn a potential financial disaster into a manageable hiccup.

You also can't pay your credit card bill with another credit card if you come up short one month. Being just $25 short on your minimum monthly payment is still considered late. One missed monthly payment will incur a late fee and lower your credit score. Two missed payments could cause your interest rate to skyrocket, with penalty APRs often reaching 29% or higher. At that rate, fees and interest will accumulate to the point where it feels impossible to pay off your debt, and you could spiral into default and even bankruptcy.

The psychological benefits of keeping an emergency savings fund

Even if you have answers for all of the scenarios mentioned above, the most compelling reason for maintaining a small emergency savings fund has nothing at all to do with math or even rational decision-making. It has to do with psychology and emotion.

Economists may operate under the assumption of rational behavior, but we humans are not always rational, which is often we end up with unmanageable debt in the first place. Studies analyzed by Psychology Today show that it's not a rational decision-making process, but rather perceived emotional benefits, that motivate consumer purchasing patterns.

This is evident when you consider the popularity of paying off debt using the "snowball" method over the "avalanche" method. When you consider the numbers alone, the avalanche method saves you the most money by a significant margin. However, when you take into account actual human behavior, the snowball method is often more effective at helping people repay their debt faster.

One study by the Journal of Marketing Research gave participants a series of regular "paychecks" and asked them to allocate each paycheck to paying off multiple debts. The optimal way to pay off multiple debts is to put as much money as possible toward the highest debts first (the avalanche method). Even though they could track their progress from round to round, seeing that their high interest balances were decreasing at a much slower rate, only 3% of these participants chose to allocate their "paychecks" in a way that was even remotely optimal. The vast majority chose to start by paying off smaller debts first (the snowball method).

People are motivated to achieve big goals by first achieving smaller goals. The average person would feel very demoralized by putting a $1,000 emergency on a credit card and watching their balance go back up to where it was when they started. This perceived lack of progress could kill the motivation they had to pay off debt quickly.

What's more, getting out of debt is all about behavior modification and building better habits. Once you get into the habit of covering unexpected expenses with your credit card rather than your own cash, you're less likely to search for other solutions or try to find better deals -- and more likely to overspend. One study by MIT's Sloan School of Management showed that students were willing to pay 83% more for something when using a credit card instead of cash.

Two of the most important financial habits to establish -- and two that most Americans lack -- are building savings and refraining from using credit cards to pay for things you can't afford. By forcing yourself to contribute to a savings account, you're building an essential habit. Plus, providing yourself with a debt-free way to cover emergencies gets you out of the mindset that you can just pull out a credit card any time you can't afford something.

Still want to drain your emergency savings? Here's a compromise

The MIT study mentioned above had one piece of salient advice for folks who have a history of questionable financial habits: always leave home without your credit card.

If you still want to drain your entire savings fund to pay off your credit cards more quickly, at least leave the credit card at home so you can't use it impulsively. If you really want to make sure you stay disciplined, try freezing your credit card -- literally. Put it in a block of ice in your freezer. That way, if you ever think you need it, you have to let that block of ice thaw before you can use it, and you'll have to spend that whole time ruminating on whether or not the purchase you're about to make is truly necessary.

In the end, the decision comes down to financial discipline. If you're sure you have it, then go ahead and put 100% of your savings toward your credit card bill. But if it turns out you don't have the discipline, and you start racking up debt once again, you could end up losing a lot more in the long run.

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