pay off credit card or save the money, help me decide

[fieryred33143]

I am actually getting a refund this year and coupled with FI''s refund, we can pay off one of our 2 credit cards and still have money left over.

I know the obvious choice is to pay off the credit card because when you have debt, you don''t really have a savings account KWIM?

However, he will be out of a job in August. He is getting a severance package and he has some other job opportunities that look promising but nothing is finalized. If he wants his severance package (which also includes keeping some perks that we use) he has to wait until August before starting a new job and we decided that we want the package for a variety of reasons. He could get a job immediately in August, it can take a month or two, or it can take him a few months.

All of that said:

If we keep the money in our savings account and continue paying off the credit card as I have laid out in our financial plan (we have a set amount we send to the credit cards each month) then when he loses his job in August, we''ll have 6 months worth of bill payments saved up so that''ll give him 6 months of flexible time to find another job. The credit cards will be paid off in 2011.

If we use the money now to pay off the credit card, he''ll only have 3 months of flexible job finding time. But we''ll be credit card debt free by October 2010.

When I look at our 2011 financial plan putting in all of these factors, the end of year amount only differs by 3,000 if we pay off the credit card now.

After the 3/6 month period is up, then we''ll be moving into a savings plus month-to-month situation before he finds another job. I do have money set aside for expenses specifically related to my daughter that I do not touch and will not touch.

I wish I could say with certainty that he will find a job quickly. I cannot say that, especially when I have friends who have degrees and years worth of experience who are still looking for employment and it''s been close to a year. He is more than willing to take any job that comes his way if things get to a financially desperate point (which thankfully I don''t think we''ll be in but you never know).

The financial side of me says to pay off the credit card now that the money is there. The worrisome side of me wants to save every penny to be able to pay off our household bills (even though its not really saving).

WWYD?

 

[Lula]

Since you have a plan in place that will allow you to pay your credit cards off by 2011, I say save the money so you''ve got a cushion during the job search. Put the money in a short-term CD or something so you won''t be tempted to take it out and use it for something else.

 

[radiantquest]

I would say save it. It is better in my opinion to have that cushion just in case and then have the cards paid off in a year then pay the cards off and possibly run into a really bad situation. You could always save the money and then when he gets a job right away and the severence works out well pay it off then. I know that it is more interest, but I think it is wise to not be stressed come August.

 

[elrohwen]

I vote for save it. I''m going into month 6 of unemployment and saving everything you can is so important. You''ll still pay off the cards by next year, so I don''t see a problem with it.

 

[cara]

I''m pretty conservative about safety cushions and such, so with the impending job loss I would save the refund $$ and keep making your payments on the debt for a payoff in 2011. If FI gets a job early in the process I would still keep at least 3 mo of savings in reserve and then use the rest of the held-back money to pay off the credit cards once he is safely employed again.

Just me personally, other people would make other decisions!

 

[vc10um]

Date: 4/15/2010 5:10:35 PM
Author: radiantquest
I would say save it. It is better in my opinion to have that cushion just in case and then have the cards paid off in a year then pay the cards off and possibly run into a really bad situation. You could always save the money and then when he gets a job right away and the severence works out well pay it off then. I know that it is more interest, but I think it is wise to not be stressed come August.

Agreed.

Normally, I''m all about paying off the credit cards as fast as possible. But right now, I think it''s important for you to have as much cushion as possible. And RQ is right...if he does get a job quickly, you can turn around and take all that money you were holding on to and dump it onto the credit card bills, so you''d be somewhere between the October 2010 payoff and the 2011 payoff.

 

[Guilty Pleasure]

I would certainly pay off the credit card. I''m a bottom line type of person, and unless your savings return is higher than the interest on your credit card, you are losing potential money. I would plan have enough cash to cover several months of only those bills which must be paid in cash (or check) and not save up for the others; put the rest of the surplus into the credit card payment. If you have to add debt later to the credit card, that is still better in my opinion than keeping debt now.

just my two cents.

 

[fieryred33143]

Date: 4/15/2010 5:21:11 PM
Author: Guilty Pleasure
I would certainly pay off the credit card. I'm a bottom line type of person, and unless your savings return is higher than the interest on your credit card, you are losing potential money. I would plan have enough cash to cover several months of only those bills which must be paid in cash (or check) and not save up for the others; put the rest of the surplus into the credit card payment. If you have to add debt later to the credit card, that is still better in my opinion than keeping debt now.

just my two cents.

GP, you and my financial side are on the same page

I just keep thinking what if it takes him over a year.

Thank you to everyone who has chimed in so far. You all are giving me a lot of good pointers

 

[Guilty Pleasure]

Date: 4/15/2010 5:26:00 PM
Author: fiery

Date: 4/15/2010 5:21:11 PM

Author: Guilty Pleasure

I would certainly pay off the credit card. I'm a bottom line type of person, and unless your savings return is higher than the interest on your credit card, you are losing potential money. I would plan have enough cash to cover several months of only those bills which must be paid in cash (or check) and not save up for the others; put the rest of the surplus into the credit card payment. If you have to add debt later to the credit card, that is still better in my opinion than keeping debt now.


just my two cents.

GP, you and my financial side are on the same page

I just keep thinking what if it takes him over a year.


Thank you to everyone who has chimed in so far. You all are giving me a lot of good pointers

What if it does take him a year? You're out of money AND you still have a looming credit card bill on top of your month to month bills. I can totally understand the mentality of having a cushion and have no disrespect for that choice if you do go that way, but just think about the bottom line. I would chose the credit card as my safety net if I were in your shoes. My thinking would be, "Pay off the credit card now, give less money to someone else in the long run and be debt free going into potentially hard times. I can always build the credit card debt back up if it comes to that."



eta: I may be misunderstanding, but did you say that the difference would be 3000 dollars, meaning that is the amount you're paying in extra interest if you wait to pay it off?

 

[perry]

I would also naturally tend to say pay off the CC''s; but, there is also the question of how to manage debt and future expenses. So the concept of savings has merit.

I would look for a middle ground. What if you paid off half of your CC and banked the rest. That also has the advantage of shrinking your monthly CC bills to make it easier when crunch time hits.

I have lived through a period when I lived off of my CC''s (kept taking cash advances - and using different cash advances from different cards to pay my CC bills).

I also recently was wondering what to do with an extra $5000. Did I put it towards paying down the house or car; or did I bank it. In the end I banked half of it.

Best wishes in this.

Have a great day,

Perry

 

[luckystar112]

If it were me I'd pay off 50% of the card's debt and save the rest. Then I would re-calculate my payments so that my payments are smaller but the card is still paid off at the scheduled time.

 

[steph72276]

While I would normally be all about paying off the debt, since you know for a fact that a layoff is looming, I would actually advise you to save every penny, and only pay minimums on the credit cards....but the key is to actually save it and not spend it on other things. I would get on a tight budget, save all you can, then when he is employed again I would take that savings and pay off all your debt and then build your emergency fund up again.

 

[isaku5]

I ditto that! As a second choice, though, half and half seems like a good idea too.

 

[Tuckins1]

Pay off credit cards, it will save you money in the long run!

 

[Dancing Fire]

pay off your CC now!! why paid loan shark interest rates?

unless you get one with 0 % interest CC.

 

[kenny]

Definitely pay off CC.
Then you'll stop throwing that interest money into the toilet; right now you need all the money you can get.

You know you are getting laid off, so wouldn't it be nice to have that credit balance available for emergencies?

 

[RaiKai]

How much is it costing you to carry that credit card debt (as in interest only)? Unless you can transfer the balance to a lower interest (i.e. a 0% for 6-month intro offer or a low-interest line of credit) I would pay it off. Or else you are just paying them to keep holding your debt for you.

Then, if you need a "cushion" you will have some available room on it. Or better yet, before there is an unemployment issue take out a low interest line of credit to get you by for a little bit.

I have been in a similar position the last year or so as DH is not working (took early retirement to go back to school). When I come into extra money (i.e. my own tax return) I put it against the debt just to free up from those pesky monthly payments and save some interest. Then the room is there if we need it. Granted, I used my own tax return this year to pay for my new ring...but that had been put on credit card to pay and then was paid off with tax return.

Anyway, I too would be tempted to save it as a cushion....I currently have a huge amount of student loans and lines of credit so I am somewhat used to having a large amount of debt hanging around at this point even though DH is not working...but it can become quite stressful when there is some employment uncertainty to have hanging around and you have to make payments on it. I get a little freaked out. And the cushion is not very effective if you need to use it to make those payments. Don't forget too...while it does not happen that often if you have good credit and keep the payments - a company or bank can call in your debt ANYTIME they want or jack interest rates up, and so on. Pay it off, and be done with it.

 

[decodelighted]

Date: 4/15/2010 6:20:15 PM
Author: kenny
You know you are getting laid off, so wouldn''t it be nice to have that credit balance available for emergencies?

They can take AWAY that credit line, as many credit companies are doing -- even without late payments or any "reason" whatsoever.

Keep the cash. JMHO.

 

[RaiKai]

Date: 4/15/2010 6:36:44 PM
Author: decodelighted

Date: 4/15/2010 6:20:15 PM

Author: kenny

You know you are getting laid off, so wouldn''t it be nice to have that credit balance available for emergencies?

They can take AWAY that credit line, as many credit companies are doing -- even without late payments or any ''reason'' whatsoever.


Keep the cash. JMHO.

But they can also call in your debt.....for repayment in full at anytime. And if you can''t do it....then it is collections, court, etc.

 

[Octavia]

Date: 4/15/2010 5:41:58 PM
Author: luckystar112
If it were me I''d pay off 50% of the card''s debt and save the rest. Then I would re-calculate my payments so that my payments are smaller but the card is still paid off at the scheduled time.

I mainly agree, my first instinct would be to split the difference. Although I would say to decide what a reasonable amount of padding in your savings would be and to use the rest toward the CC -- this might not be exactly 50%, but whatever amount works best. If your FI gets a job more quickly, you can bump the CC payments back up to the original amount and pay it off sooner, but anything you can put toward principle now is less interest in the future.

 

[meresal]

I realize you said that keeping the refund would allow you 6 month worth of bill funds... however, have you taken the time to calculate how much less your monthly bills will be if you were to pay off the CC? and how long that adjusted amount will allow your SO to go without employment?

Is this job loss going to effect your family's insurance coverage? Are there any other reasons that you would need to hold onto those funds, for J.I.C purposes? (I'm thinking about possible unexpected circumstances where you would need a couple thousand at a moments notice.)

I am a no debt ever kind of person, so my initial response would be to pay off the credit card. However, given the situation, I would have to sit down and do the numbers re: the interest rate. My advice, put as much on that CC bill as you feel comfortable... and then save the rest. I just couldn't pass up an opportunity to substantially reduce my debt like that. It would free up more funds on a monthly basis.

 

[gemgirl]

Since we actually lived through a year and a half of very VERY tough times in the beginning of the recession (when my husband had no work at all and we started a very small eBay business), I''d say definitely save that money and lock it away in a CD like it''s dead money. You really never know how things are going to go for your husband looking for employment. We had my husband''s resume'' done two years ago by a professional resume'' write, his resume'' got platinum rave reviews from the company he hopes to work for soon, but because that company still has a hiring freeze in place for upper level employees, he''s still doing his own work. We *thought* he''d get in close to immediately. All I''m trying to say is that none of us can predict how things are going to go when looking for a new job now even under the best of circumstances. Our economy is still on shakey ground.

My opinion now is drastically different from the one I had all my life when I would have previously suggested that you pay off your debt. Once you live through it, you know you have to have a cushion.

 

[katamari]

If you are confident that you would get approved for another card with a 0% introductory term APR in August (which you can probably arrange through your bank) with a similar credit limit, then I would pay off the card now so that you are at least not paying interest between now and then. And, if you need to use credit later, you can at least do it without paying the interest.

If you can''t get a 0% APR card or cannot get one with a similar balance, I would probably split it. Make sure, though, that they don''t lower your limits if you make considerable repayment and you think you might need to use the rest.

Congrats on paying off your credit card debt, though--even if it is next year! That is awesome!

 

[Bella_mezzo]

I would make absolutely sure that they can''t call in your CC and/or change your interest rate then I''d say save it, if there are any loops holes, just pay off the CC. that''s my opinion.

 

[Bunny007]

I''ve been in a similar situation and I saved it. Of course you could always pay off your balance and rely on your credit cards later, if needed. But you''ll have more flexibility by keeping it in your savings. If, in the end, your husband finds a job right away and you don''t need to dip into your savings, you can still pay off some or all of your balance

 

[megumic]

As credit card debt is a true no-no in my book, and considering your current financial situation, I think I''d meet in the middle with this one. Instead of paying the minimum each month or going all in and wiping out the balance, I''d pay the minimum and then some each month to chip away at the debt at an accelerated speed. This way your monthly bill should reduce quicker, but you''re also not out the cash you may need in the event FI is unemployed for a longer period of time.

Kudos to you for even having a financial plan in place! I''m always impressed when others can project their future spending, as it''s definitely something I most certainly cannot do!

 

[PumpkinPie]

there''s no contest - paying off debt when you don''t have emergency savings is nearly never a good idea. Save it and keep yourselves safer for the short term - keep paying off the credit cards based on your financial plan

 

[ladypirate]

I say pay off the credit card--if you need to use it later to cover bills while your FI looks for a job, you can, but this way you at least save the interest you would be paying on it for the next several months.

 

[steph72276]

I''ve already chimed in on this, but I wanted to mention to you that you might want to pick up Dave Ramsey''s Total Money Makeover book. Several very wise members here (including NEL) are fans of his. His book outlines a solid, easy plan for achieving the goal of getting out of debt. He is very much against carrying any debt of any sort except a mortgage, however after many years of listening to his TV and radio show, he always says that if there is a certain job loss looming, to save every penny for just in case and begin on the plan again once you are safely employed. You need to make sure you have that money for a cushion for basics like food, shelter, and transportation if it takes way longer to find a job than expected.

 

[lizzyann]

I agree FL Steph! Save it and when he gets a new job put more towards your cc to get rid of that debt!