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redhen4's avatar

Can I get some financial advice? Credit card vs depleting savings?

Asked by redhen4 (490 points ) February 28th, 2014

I have the following “money” available to pay a $3000 roof repair:
Credit card $3100 @ 10.9% interest (has a $6800 balance right now)
Savings $1000 (making very little interest)

CC payments would be $250 if I use all $3100, or $225 on $2000

My question is which do I use? Deplete half my savings to have a lower credit card balance, or charge all $3000 on the card? (the balance of my savings is earmarked for other repairs)

My rate of income to out go is about a wash if I stop my automatic deposit of $50 going to savings.

So, use credit card for $3000 or take $1000 out of savings and put $2000 on credit card.

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8 Answers

CWOTUS's avatar

Not to try to find new ways for you to go deeper into debt, but is it possible to secure a home equity line of credit? Be advised that that (if you can get it) is a lien against the property that can be foreclosed in the event of non-payment, but it should come with more favorable terms: lower interest rate and longer term to pay, which would apparently benefit you.

In general, the less credit card debt you carry, the better. That is nearly always going to be paid at a high rate, plus it compounds monthly, so the amount can (conceivably) climb faster than your ability to make the monthly minimum payments, which will nearly always lead to bankruptcy. Especially if your savings are earning near-zero in interest, there’s no good reason to maintain that savings balance if you’re having trouble paying the card payments.

So:
1. See if you can get a home equity line of credit – for the home / roof repairs only! Don’t use this as another way to buy anything that isn’t related to keeping a (sound) roof over your
head.

2. If that fails, then place as much of your savings as you are comfortable with (the max possible) toward the repairs, and the balance on the credit card.

3. Pay off your credit card – in full! – at the earliest possible time. At the point where you can treat the credit card as just an extension of your checking account – meaning “paid off in full and balanced each month” – you will be then be able to save money again.

Cruiser's avatar

Immediately call your credit card company and ask for a lower rate. I do this every 6 months and 7 out of ten times they can lower my rate. Or if I were you I would shop for a new card that offers lower rates for account balance transfers. That 10.9% is killing you!

Can you find a handyman or someone to do a temporary repair on your roof until you pay down that credit card debt! You are way off track with a credit card balance that high. Not trying to lecture you but financially you are going one step forward here and 2 steps back. Can you pick up some extra part time work to supplement your income to pay down your debt and get debt free for once??

ARE_you_kidding_me's avatar

Keep $1000 in the bank. See if you can get some kind of an unsecured or HELOC loan through your bank for the roof or keep patching the roof until you have enough savings to pay for it. Start knocking out the small debts and as you pay them off take the extra money and make larger payments on the next largest and so on. Only pay the minimums on the largest ones while you are doing this. Hit them one at a time like this until they are all gone. Then get some money (~4 months of bills) in the bank. You’ll wind up with your credit intact and it will probably improve.

redhen4's avatar

@CWOTUS I tried to get a line of credit, my income to debt ratio is not good, outgo is almost as much as income.

@Cruiser I thought 10.9% was great! I have it thru the credit union. I have another card with 13.99% that will go up next month to 17.99——and I did call and get the rate lowered,for 6 months. But I did have interest free for almost 2 years. Unfortunately I was not able to pay it off like I’d planned with a tax refund.

Also, the reason I’m back up is dental, vet and car repair bills. I don’t take trips or shop with it. My car is 12 years old with 100,000 + miles on it, so it needed some work.

@ARE_you_kidding_me , I can’t get a a HELOC loan, back to that debt to income ratio again. But the rest of your advice I was just reading on Mary Hunt’s web page and plan to do that, paying off the higher interest card first, paying more than the minimum, which I had been doing.

Thanks for the input.

Cruiser's avatar

@redhen4 I just called my CC thinking it might be time to try and get it lowered and to my surprise I am getting 3.74% APR.

I checked online and there are a slew of CC Co’s offering 0% interest for 18 months with account balance transfers, but the down side is the APR’s are 11.99% after the 18 months. You could then shop for a new card.

Look at a monthly statement and you can see the amount of interest you are paying, multiply that by 18 months and that is what you can save over 18 months or simply put towards paying down the balance you transferred while preserving your savings.

CWOTUS's avatar

You can never get ahead if you’re paying that kind of interest and maintaining a debt balance. The best advice that I can give you is to imagine that your credit card is used “in lieu of checks” against your bank balance. So if you don’t have the money in your bank account, then you can’t make the charge, period.

If the “emergencies” are piling up faster than your ability to pay out of current income / savings, then you must re-evaluate your entire budget to reduce or eliminate payments that you may now consider essential.

redhen4's avatar

@CWOTUS That is my next step. A while back I cancelled cable and got a converter box and antenna. Then I upgraded my internet and got a ROKU. (I’d only ever had basic cable anyway, so didn’t miss much.)

Now my internet has gone up, and I’ve been subscribing to HULU and together those are $50/month. I am seriously considering cancelling my internet now but hesitate because I use it for not just HULU but download books and WiFi to my Nook Tablet. If I stop all that there goes my entertainment. I read a lot and was going to the library a lot. The Nook let me stop going to the library (and using up gas). I’m waffling back and forth, but don’t see how I can’t not stop paying $50/month.

@Cruiser I did the zero interest for 22 months. That has passed. As soon as I am able I’m paying off that card first. The CU card isn’t bad and was paying down pretty quickly.

JLeslie's avatar

Don’t completely deplete your savings. I hate credit card debt, but it sounds like you have to do this repair now. See if you can get a lower rate on your credit card or a new card. Beware of no interest cards that you can transfer your balance, because many of them if you don’t pay off the balance at the end of the time period they charge you high interest and the back interest.

Can you save more than you have been? Really tighten your belt and knock out the debt quickly? Once you are out of debt you can start saving at such a fast rate. The interest on credit cards is a killer, it keeps you under water. You obviously know this from what you wrote in your question, I am not trying to lecture. Maybe take a part time job for three months? Get all the debt behind you.

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