Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about the best way to pay off credit card debt. This is an important topic for millions of Americans. Your financial future depends on getting the answer to this question right.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “9 Tips for Finding Good, Cheap Debt Help” and “2-Minute Money Manager: Should I Use a Credit Counselor for Debt Help?” You can also go to the search at the top of this page, put in the word “debt” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Today’s question comes to us from Jodie:
What’s the best way to pay off credit cards? I have extra cash. I did use some of it on paying down debt, and I’m being super frugal right now — budgeting, not using credit cards or buying things besides necessities. A huge chunk of my credit card debt is gone, but the balance left is $8,500. Yikes! What is my best option to tackle my debt on the existing credit card balance: One, transfer to a zero interest card. Two, pay more of my money from savings. Three, use a home equity line of credit.
OK, Jodie, let’s look at each of these three options:
1. Transferring to a zero percent interest credit card
This can be a great idea, as long as you’ve got all of your spending leaks plugged, so you know you’re going to be able to pay that debt off during the zero percent interest window.
When you transfer a balance to a zero percent credit card, you’ll typically have the zero percent terms for anywhere from a year to two years, with 18 months being the average.
Just be sure you can pay them off in the time allotted. Also, be aware there may be a transfer fee, which is a fee to transfer a balance from a high-interest credit card to that zero-interest credit card. Obviously, if there’s a fee, you have to take that into account, because that’s essentially additional interest.
You can find zero-interest credit cards without transfer fees, but there aren’t many. Still, if you can do a fee-free transfer, get a zero percent interest rate and know you’re going to be able to pay it off in the time allotted, these can be a good idea.
2. Using savings to pay off debt
There are some financial gurus out there who will say, “Oh, no: You have to keep a huge emergency fund.”
Everyone should definitely have an emergency fund, but not everyone’s situation is the same.
If you’ve been working at the DMV for 35 years, you’re probably not about to get laid off. Your emergency fund may not need to be as big as other people’s. If your job is stable and you know you’re going to keep it, I’m not suggesting you spend your emergency fund down to zero. But if you’re paying 18 percent interest on a credit card and earning 1 percent on your savings, there’s nothing wrong with using savings to pay debts.
So, if you’re not worried about losing your job — and you know you’re going to have money coming in and keep some money in savings — go ahead and pay off that high-interest debt.
3. Using a home equity line of credit
Borrowing against your home can also be a decent idea, as long as you’ve got your spending leaks plugged.
Why do I keep saying, “As long as you’ve got your spending leaks plugged?” Because a lot of people use debt to finance a lifestyle they can’t afford. If you put your house up as collateral for a loan — which is what you’re doing when you get a home equity line of credit — you’re literally betting the roof over your head you’ll be able to pay it back.
There’s an expression in the credit counseling industry: “Buy a blouse, lose a house.” If you’re spending more than you’re making, fix the problem before you begin to consider this solution.
If you’ve gotten your spending under control, and you’re just trying to pay off your debt as quickly as possible, awesome. A home equity line of credit could have a lower interest rate than your existing credit card, so it could be a good idea. Just be aware of the fees and comparison shop.
And no matter what you do, don’t ever do anything until you know you’re going to be able to pay off that debt and not accumulate more. And if you need help with debt, find it!
Hope that answers your question, Jodie.
I’ll see you all right here next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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