Use Cash Savings To Pay Off Credit Card Debt

Added December 10, 2006 by By Ilyce R. Glink

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Summary: If you've found yourself in a situation with a large amount of credit card debt and cash on hand, take the cash to pay off the credit card debt. While it might be nice to think you have a cushion of cash for an emergency, there's no point in paying high credit card interest rates when you have the cash to pay it off. If you simply pay off the debt, and then start to "repay" yourself with the savings, you'll quickly replenish your cash savings.

Q: My wife and I have approximately $50,000 in credit card debt with interest rates ranging from 9 percent to 29 percent. Our annual income is above $250,000.

We are maxing out our 401(k) plans at work and have another $100,000 in mutual funds and stock. Also, we have $280,000 in cash which came from an employment contract payout, and the taxes have already been paid on that cash.

I want to pay off our credit card debt. My wife says keep all the cash. What do you think?

A: I vote for dumping the credit card debt. There's no point in shelling out the kind of interest you're paying when the cash you have on hand is only earning 4 percent in the bank (and on that money you pay tax, so you're really only pocketing about 2.5 percent).

You'll hardly make a dent in the cash you have on hand, and you won't be paying out up to 29 percent interest. If you simply pay off the debt, and then start to "repay" yourself with the savings, you'll save another $50,000 fairly quickly.

I do wonder why she is so attached to having that much cash sitting in a bank account. Is she worried about going further into debt? Is she afraid the cash will suddenly disappear? Or, is she secretly thinking about quitting her job, and that cash is her cushion.

You and your wife should have a conversation about this soon.

In the meantime, you win this round. But going forward, I hope you and your wife will both agree to live within your means. Piling on credit card debt isn't a smart financial move, and I'd hate to see you whittle away your savings unnecessarily.

Published: Dec 10, 2006

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