Is Your Credit Card Balance Bigger Than Your Savings? Here's What to Do

A high credit card balance can cause a lot of financial stress, but it's a problem you can solve if you follow the right steps.

When you owe more money on your credit card than you have in your savings account, it can feel as if you're between a rock and a hard place. You could try to pay off your debt without touching your savings, but then you'll pay more in interest. Alternatively, you could use your savings to pay off as much debt as you can, but that leaves you with nothing in case of an emergency.

The best approach is one that allows you to pay off your credit cards and keep some savings for financial security. Here's how you can do that.

Don't drain your savings

It's tempting to pay as much as you can toward your credit card balance right away. Credit card interest costs much more than you could earn from even the best savings accounts, so you'd save money on interest charges.

However, it's better to hold onto at least a portion of your savings. Imagine if something goes wrong and you have bills you can't pay with your credit card, such as a mortgage. Perhaps you'll lose some of your income, face an unexpected expense, or a paycheck arrives late. If you've already depleted your savings, then you won't have many options.

Now isn't the time to be without savings, especially in the light of the economic instability caused by COVID-19. Even a small emergency fund can give you peace of mind and protect you if you need some quick cash.

Tighten up your spending

There's no secret to paying off debt. The more that you can pay toward your balance every month, the faster you'll pay it off.

That's why the most important step is to review your budget and your monthly spending. The goal is to see how much money you can free up to put toward your credit card balance.

Look for both non-essential expenses you can cut and essentials where you could potentially get a better deal. A good example of the latter is cell phone service. If you have a plan with a major carrier, it's often possible to save money by switching to a prepaid plan with a smaller provider. Changes like these can add up and help accelerate your repayment plan.

Commit to a monthly payment amount

Once you know how much extra money you have, you need to work out how much you'll pay toward your credit card balance each month. The standard recommendation is to put all your discretionary income toward your credit card debt.

That's usually a sound approach. But some consumers may prefer to divide discretionary income between debt and savings. This can work well, too, especially if you want to boost your emergency fund because you're worried you don't have enough saved.

Here's the key to staying on track -- make those payments right after you get your paycheck. You may have heard the popular financial advice to "pay yourself first," and the same logic applies here. If you pay your card issuer or deposit money into your savings straight away, you won't be able to spend that money on other things.

Making your credit card payment right away guarantees that you get it done. There's no risk of reaching the end of the month, only to find that you overspent and can't pay as much as you originally planned.

Consider balance transfer credit cards

Balance transfers can save you a ton of money while you repay your credit card debt. First, you open a credit card with a 0% intro APR on balance transfers. Then, you transfer your credit card balances to that card. There may be a balance transfer fee (typically 3% of the amount transferred), but you'll have the entire intro period to make payments on your debt without interest charges.

The main catch is that the best balance transfer cards are aimed at consumers with good credit. Assuming you have the credit to qualify, this type of card is a smart way to pay off debt. You'll also need to be disciplined about paying down the debt during that intro period.

Paying down your credit card balance

It's never a welcome sight to see that your credit card balance is bigger than the balance in your savings account, and you certainly don't want it to stay that way.

Your best bet is to chip away at your debt gradually. Figure out how much you can afford and make sure you pay that amount every month. If you have a good credit score, then you could also get a balance transfer card to help you pay off your balance more quickly and with less interest.