Paying off Credit Cards to Save Money

Posted On: December 20, 2005

Author: ET
Posted: Sat Jun 12, 2004 9:25 pm
Post subject: Paying off Credit Cards to Save Money
10/24/2002 6:23 am CDT

I had been planning to slam credit cards with high payments by pumping nearly all my wages into it. But then I thought about it and decided it would be better to SAVE to have a backup for payments should I miss a couple of weeks of work for being sick or something.

So I’ve decided to pay twice the minimum payments on Metris and Capital One (Minimum is $15, so I’ll pay $30 each) and I’ll pay Providian $70 per month. The minimum is $67.00. Also I have recurring charges of $21.95, $20.80, and $11.95 going to Metris. I’ll pay Metris that, in addition to the regular $30 payment so my balance will go down each month instead of staying the same.

My reasoning for paying off my ~$2500 in credit card debt so quickly was so I could then start saving… but in seeing the interest-earning benefits of saving, say, $1,000 per month, I see no reason why I shouldn’t.

Anyway, the way I see it, if I spend one year saving $1,000 per month, I could buy a $1,000 certificate of deposit every month for that year and each one would be a 5-year CD to get the maximum interest rate available. At an average interest rate of 4.75%, toward the end of 2003, I’d be earning $47.50 per month in interest, plus I’d still have all the deposits that I could break if I really had to, but I’d also keep a reserve of, say, $5,000 in liquid cash in a Money Market account.

But $47.50 per month isn’t really bad, even if it means that $12,000 is tied up in CD’s. After 21 years, I’d make all that money back, anyway, and I certainly have more than 21 years of life left. If I could save that $1,000 per month for five years, then that would be $237.50 per month in interest, and perhaps more since the interest rates today seem to be so low.

Anyway, I figure I’ll try to save that, then use the extra money earned in interest toward paying down the credit cards a little faster, plus any excess over $1,000 per month I could apply toward the cards.

Are there any “investments” with guaranteed higher rates of interest? And I’ve heard that earning interest in money market accounts isn’t always guaranteed. Is there a chance that your account balance could FALL?

10/24/2002 7:06 pm CDT

MY OPINION~I WILL PROBABLY GET SHOT DOWN FOR THIS…if you are paying more for the credit cards, than the savings is paying, pay the credit cards DON’T put money in the savings because your basically WASTING MONEY.

10/24/2002 9:59 pm CDT

Not gonna shoot ya down, mouse, but when you’re on a tight budget and even though it makes sense to reduce your interest on credit cards cause it’s higher than the interest you gain on savings, the fact is that savings is money in the bank and credit cards are monies that can be borrowed with interest. If there is no money in the savings account and you blow a flat tire and have to get new tires and a front end alignment, you end up charging it and paying interest. Taking the money out of the savings account is almost free because of the low interest they pay and credit card interest you don’t have to pay. Does that make sense?

10/24/2002 11:33 pm CDT

The money in the savings COULD have been used to pay off the credit card balance earlier.

You make the difference between the savings interest and the credit card interest.

CREDIT CARD 16% vs. SAVINGS 2% = ABOUT 14% BETTER.

10/25/2002 7:35 am CDT

Still, I think it’s a good idea to have in savings AT LEAST twice as much money as you have in total credit. But if you have the luxury of being able to save enough that you can have an account with $10,000 liquid cash, you can just use it like a credit card. $10,000 is your limit. Buy something with that cash, then pretend you’re paying a bill by putting the money back into the account. If it’s an interest bearing account, it’ll kind of be like being charged for it. That’ll be your 4 or 5 percent interest you’re not earning on the money you spent. If you have a credit card with the same interest rate as your money market account, then you break even. If you have a card with a 0% intro rate, it’s better to use the card and keep the money in savings. Then, when the intro rate ends, pay off the card and start paying the bill back into savings.