Savings or credit card debt: what to pay first

When you have a little extra money, it’s hard to know where it should go. Paying off the card feels urgent. Having nothing saved feels scary. Both feelings make sense. Here’s a simple way to decide.

Why the card usually wins on math

Credit card interest is usually much higher than what a savings account pays. So a dollar that pays down a card often saves you more than the same dollar earns sitting in savings.

Why you still want some savings

The math isn’t the whole story. If every spare dollar goes to the card and then the car breaks down, the repair goes right back on the card. The CFPB notes that without savings, even a minor shock can set you back, and if it turns into debt it can have a lasting impact (CFPB).

A small cushion is what keeps your progress from sliding backward.

A simple order to follow

1. Pay at least the minimum on every card, on time. Paying very late can let the card company raise your rate (CFPB).
2. Build a small starter cushion. There’s no magic number. The CFPB suggests thinking about the surprise costs you’ve had before and what they cost (CFPB). That gives you a realistic first goal.
3. Send everything extra to the card with the highest APR. That’s the avalanche method, and it saves the most interest. (More in avalanche vs snowball.)
4. Grow your savings once the cards are paid off, using the money that used to go to them.

If a bigger cushion helps you sleep, it’s okay to split your extra money for a while. The cards will take a little longer, and peace of mind counts too.

Using savings to pay off a card in one go

If you have more saved than your starter cushion, putting the extra toward your highest-rate card can save real interest. Try not to empty savings completely, though. Keep the cushion, use what’s above it, and then send the old card payment back into savings until it’s rebuilt.

When savings can come first

A couple of cases where leaning toward savings makes sense:

• Your pay changes month to month. A bigger cushion smooths out the slow months.
• Your card is at 0% for now. While there’s no interest, building savings costs you less. Just plan to pay the card off before the promo ends. (Here’s how to find your debt-free date so you can see where you’ll land.)

After the cards are gone

The day your last card hits $0, you’ll have a monthly payment with nowhere to go. That’s the moment savings gets easy. Keep paying the same amount, just to yourself. The free Haluvra app shows your debt-free date now, and once you get there, it helps that same money build a savings goal.

Or try the free debt payoff calculator

Keep reading

• Avalanche vs snowball: which debt payoff method is actually better
• How to calculate your real debt-free date