Could it ever make sense to keep money in the bank when you have credit card debt?
Before you answer, consider this: The national average interest rate earned on high-yield money market and savings accounts is a whopping 0.11%, according to bankrate.com.*
Yes, that's point one-one percent.
At the same time, the average interest rate being charged by "low-interest credit cards" is 10.37%. That's a big difference.
So let me ask again. If you have extra cash and credit card debt, should you throw the cash at the debt or sock it away in the bank? Believe it or not, I say ignore the numbers and save some.
Here's why:
- (Some) savings is necessary. Perhaps you've heard the old saying that two things in life are certain: death and taxes. Well, I'd like to propose a third: financial emergencies.
If you use all of your money to pay down debt, how will you handle unexpected expenses when they inevitably arise? If you're like most people, you'll pull out your credit card. That's why your first step, even if you have a bunch of credit card debt, should be to set aside at least a small emergency fund -- perhaps $1,000. That way, when you need cash, you have it.
- Having cash can help change behavior. Not all debt is the result of poor decisions or bad behavior. But if you have debt and it was your fault (be honest here), your first step to getting rid of it is to change the behavior that got you in debt in the first place. That means you've got to stop buying things if you can't pay for them with cash. And of course, you can't pay for things with cash if you don't have any set aside.
To be clear, I'm completely aware that my suggestion makes no sense mathematically. Earning less than 1% on money that could be used to pay off debt at over 10% is pure lunacy from a mathematical perspective.
But for many people, fixing this problem really isn't about doing math. It's about setting themselves up for success and changing behavior. Having a little cash in the bank can go a long way toward getting there.
