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How to pay off debt without tapping emergency fund

Erica Sandberg

January 7, 2016

QHi Erica,

I have always kept $1,000 in a savings account for good luck. I never — until now — have had debt. My credit card balance is always $0 because I’m a cash girl. Until now. My card now has $864.33 on it. My bills for Christmas were very big — not due to my fault but because of a last-minute plane ticket for my aunt that I had to pay for unexpectedly. I am very, very careful with money, and I do not have $864.33 in checking. By my calculations I can pay only $233 on the card this month. But I have the good luck money I have been saving. Should I use it to pay off this card? — Mia


ADear Mia,

I’ve never heard of “good luck” money, but I like the concept! Having funds in the bank at the ready can absolutely make you feel fortunate and secure. Debt, on the other hand, can inspire opposite feelings, such as uncertainty and even despair.

Of course, you can certainly pay off your debt in one lump sum with your “lucky money,” and you would save some money in interest costs. However, if you can continue to pay the debt off in several large chunks without dipping into your savings, then by all means, go ahead and do that.Ask Erica

Based on your desire to maintain your nest egg, here’s what I’d like you to do:

  • Send what you can spare now to the credit card company. Do the math: $864 less $233 is $631. That’s your new balance.
  • Assuming you always have at least $233 left over after paying your normal bills, pay this fixed sum to delete the remaining debt over time.
  • Don’t charge with the card again until you’re at zero.

In less than four short months, you’ll be debt-free. Yes, there will be a little interest to pay incrementally, but it won’t be prohibitive. Even if the interest rate on this account is extremely high, the financing fees will be low because the balance is small — just $30 for an APR of 29 percent. And if your card has a preferred rate — say, 11 percent — the fees would be around $10.

You’re lucky to have this credit card. It appears that you had to pick up the travel expenses for a loved one, and while you could have used cash, charging is the better way to pay for airfare. Consumer protection is built into the credit card account, so if something went wrong with the transaction you could easily dispute it with the issuer. And, as is evident here, the card gives you the option to spread the cost out if you need to do that.

You don’t mention how often you use this credit card, but if it’s a rare event, I suggest accelerating it a bit. Issuers have the right to close dormant accounts, and it’s a good idea to have this card handy.

Aside from flexibility, charging responsibly and regularly will build your credit rating. Credit scores are based on activity listed on a consumer credit report. Occasionally borrowing a small amount and then repaying it in full and on time is exactly the kind of information that will increase a score. One day you may want to borrow a large amount for a car or home, and an excellent credit rating will help you to secure a low-rate loan.

Of course, you also could tap your emergency fund to avoid  interest and immediately pay off your card debt. You’d even have money left over to start rebuilding your good luck money. The choice is yours. Many people, though, prefer not to raid their savings except in dire emergencies.

As for your special good luck money, keep it up! Consider adding more to it every month until you accumulate a few months’ worth of necessary expenses. This way if you experience an unlucky event, such as unexpected unemployment, you can dip into your emergency fund without upsetting your financial equilibrium.

Got a question for Erica? Send her an email.

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