Credit Cards

Tips, news, reviews, caveats, trends, updates and analysis related to consumer and business credit cards, and prepaid debit cards. From the interest rate specialists @ FedPrimeRate.com

Sunday, September 14, 2008

Large Savings Account vs. Paying Down High-Interest Credit Card Debt

Most of us know that paying interest on credit card debt is one of the best ways to throw away money, no doubt. With regard to contemporary credit cards offered by reputable American banks, money-savvy consumers:

  • surf 0% credit card offers

  • are never late with payments

  • make every effort to keep their credit score high so that they can qualify for the best -- best as in most consumer-friendly -- credit card offers available in the market

  • if they aren't surfing 0% offers, pay their balances in full each month to avoid interest charges

  • take full advantage of their credit cards' rewards programs.

  • use credit cards to pay for all types of goods and services, so as to take advantage of the excellent consumer protections that most credit cards provide like zero fraud liability and purchase protection.

Bottom line: if you are a solvent and responsible consumer, credit cards work for you, and not the other way around.

Sometimes, I encounter a friend of family member who is paying interest on credit card debt, but who also has a relatively robust savings account. I explain how this doesn't make sense, because if you are paying e.g. 12% interest on your debt, and making 3% in your savings account, you are losing money -- and plenty of it -- each and every month. I often hear the excuse, "but I like to have a rainy-day fund." Yup, establishing and maintaining a rainy-day fund is an excellent idea, but it's important to find the right balance. I agree with the advice in today's YouTube.com clip: the only situation where it's reasonable to pay interest on credit card debt is if you have a good reason for stashing away a lot of cash, like if you believe that you're about to get laid of from your job. Here's the clip:

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