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"The Capps started cutting back. In late spring, they began to trim their spending and paid down about half of their $11,000 credit-card debt. This summer, they
by dangoldin 18y ago
"The Capps started cutting back. In late spring, they began to trim their spending and paid down about half of their $11,000 credit-card debt. This summer, they used more than half of their government stimulus check, about $1,000, to open a savings account with an attractive interest rate of 5%."
They'd probably be better off paying off their credit card than opening a savings account.
Edit: Just got to the part that says they had already paid off their CC balance. My mistake.
- natrius 18y agoI think you were right to begin with. They opened the savings account in the summer and fully paid off their credit card debt in October.
- dangoldin 18y agoNice catch.
- iigs 18y agoAs a person with some savings and some credit card debt and an uncomfortably large amount of mortgage debt, I'll say that in an economic downturn there's definitely value in having liquid cash to spend -- you can cover important debts such as taxes or mortgage during a job loss. It's technically cheapest to run your savings as low as possible in favor of paying down debts as aggressively as possible. I was doing that a couple years ago when times were better, but for the moment the cost (a couple years of financing your savings at reasonable credit card interest rates) sure beats having your own personal liquidity crisis.
- dangoldin 18y agoI suppose you're right. I'm still young and only have college loans to pay but they're at a higher rate than my savings account so I pay them off. I understand having a mortgage that you aren't paying off but credit cards have a greater than 20% interest rate whereas a mortgage would be under 10%. Credit card debt tends to be smaller than a mortgage though so I would seriously consider paying that off to be a higher priority.
- Retric 18y agoI have 4k of CC debt at 9% that's 30$ / month. Now IMO paying that down vs waiting a month is not really that big a deal vs. having a fair amount of cash on hand. I just got an offer to roll that over at 3% down till march 2010 so I might do that but I would rather pay it down vs. get tempted to keep it for another year. Anyway, I feel focusing on a few $ a month is much less important than raining in my spending. It's the big expenses that really damage my finances. I make twice what I did 5 years ago, but while I like my job keeping this job is costing me a lot of money.
- natrius 18y agoI don't see the advantage if you still have significant credit available. Let's say you pay off your credit card debt instead of saving. You then lose your job and need money to pay the bills. Wouldn't you just put the bills on your credit card? It all depends on the interest rate of your current debt compared with the interest rate of your new debt. Presumably, any new credit card debt will be at the same interest rate as your current debt since, as far as I know, new debt doesn't change your interest rate. (If it can, then having a reasonable buffer of savings does seem like the better choice.) Mortgage debt has a lower interest rate than your new debt would in this scenario, so saving is clearly preferable over non-credit card debt. Anyway, in times like these when the financial system is broken and available credit could suddenly become unavailable, saving is probably a good idea.
- Retric 18y agoYou can't pay your mortgage with a credit card. If you want cash they charge you a higher rate. So keeping cash on hand just in case can be a good idea.