Debt dilemma
Hi Everyone
We've talked to Martin Hawes about our budget, our debt and our current dilemma. He said:
Steph
The answer to your credit card question is fairly straight forward, but first, there is another option. You could as I suggested have a revolving credit facility, pay your emergency funds into it and then pay your bills from it (including that credit card bill). This way your savings and any other money that you have will be working as hard as it can by reducing interest on a daily basis (instead of gaining that little bit of after tax interest your savings are currently earning).
You’ve decided not to go ahead with that because you say you lack the discipline to resist the temptation of credit facilities (you told me that Matt is a tiger with the credit card –what is his version of this?).
Anyway – no revolving credit – fair enough, a good call in the circumstances.
So I do think you should pay the credit card bill with your emergency savings as soon as you can. You will be paying a horrendous interest rate on the credit card (my latest statement says 19.75%) – whatever it is, it will be much higher than the after tax interest earned on your savings at the bank.
I’d also really love you to cut up that credit card, but unfortunately I think that you had better keep it (but not in Matt’s wallet!). When you have paid off the credit card you will have only $700 of emergency money left (not a lot to cover illness, redundancy, leaking roof etc). If something bad happens you may need to draw out cash on the credit card. I really hope this does not happen but an unused credit card left in the bottom drawer could be a life saver. Just make sure that you do not open that bottom drawer unless you really, really need to.
Martin
Revolving credit? My head's spinning enough as it is! haha.
So pay off the credit card? Comments below seem to agree, but 1/3 of the votes so far say keep the emergency fund. I hate to see that cash cushion go, especially since with our budget we're not going to get it back in a hurry. But we'll go with whatever the voting says over the next wee while.
Thoughts anyone? Steph.
posted by sortme @ 10:52 AM
8 comments
8 Comments:
I agree with posters so far that say "pay off the credit card and then put your usual minimum credit payments back into your emergency fund so it gets topped up again". I know it feels sooooooo important to have that emergency buffer, but in the end you're losing money way faster on your interest payments on your credit card. I think if you did the sums you'd find it wouldn't take long to restock your emergency fund at all.
Agree with Martins advice excpet for keeping it in the bottom draw. Give it to the bank. Much safer there. Not only temptation to spend it but the first place burglars through is your bottom drawer.
Also the 1/3 of votes who say don't pay off your credit card and keep the savings, well one doesn't have to think to hard to wonder aloud how New Zealand has become a nation of debt. Overextending themselves on credit with money they don't have. Why isn't this subject taught in schools? In blows me away how badly educated NZer's are financially! You only have to read the trademe messageboard for a snapshot of the financially uneducated. Mind you it seems common sense doesn't even prevail on the message boards!
As always, your humble commentator. PS Do I get an award for being the best contributor to your blog???
you should definately pay off the credit card. the high interest charges alone make it a nightmare. as a previous poster said, you can always add the money you would have paid monthly on your card to your already in place emergency fund deposit. good on you for steering clear of the revolving credit. it's too big a temptation to rack up more debt. If you must use credit, only go with interest free terms, pay a deposit towards the debt & always pay more than the minimum payment due. it also has the added spin-off of giving you a good credit rating.
I also agree with paying off your credit card debt with your emergency fund. A credit card can cause an unhealthy cycle of spending the banks money (which, of course they WANT you to do) with horrendous interest costs. Speak to your husband about his wayward way of using the card, or take it off him. Even better, pay off the debt and close the account. That way neither you or hubby are tempted to use it (the banks will happily give it back to you at almost a moments notice!) I also applaud you on turning down the revolving credit facility (again, the benefits of having such a facility is really only to those who are disciplined...). Once the debt is repaid, you may be able to start saving again!?
I agree to pay off the credit card too, putting your minimum credit payments back into your emergancy fund is a great idea and it will get you back to where you were before in no time. we had huge issues with our CC (esp mine, im crap at credit) and ended up cutting it up! no more allowed for me!
your doing well, it is a lot for you to get your head around, but once you start its actually really fun and seeing the money you save is a fantastic reward :)
It is foolish to owe money on a credit card, which is high interest, if you have money sitting around in an emergency fund. With no emergency fund temporarily you can still rely on the credit card if something comes up. In the meantime - save on the interest!
Pay the credit card off then get an icecream container, fill it half full with water and freeze it plonk in your credit card fill it to the top with water and freeze again. so your card is encased in a big lump of ice. If you need to use your card you have it but in the time it takes to thaw it out hopefully it will give you enough time to rationally think of any better solutions other than using the card
How does anyone get into that amount of debt? By using a credit card.
Get your scissors & cut up the card.
Don't fall into the trap of living off future income.
Unless you happen to be psychic.
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