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Pay Off Debt at 0% or Beef Up Savings


After we were able to transfer all of our credit card debt to a new card with a 0% balance transfer offer, my plan was to pay off that debt as quickly as we could. But I realized something.

That debt is at 0% right now. Something that I could do is to use the extra money that I would be paying towards our credit cards and put it in our savings account. That way, the money could earn some interest. Before the end of the 0% balance transfer term (which is a year), I’ll take the money out of the savings and make a large payment to our credit card.

I’m on the fence as to what to do, so I thought I would open up the floor and ask your opinion. If you were in my situation, what would you do and why?


  • Reply Munky |

    I’ve been reading your blog for the past month or so, and hanent commented yet.

    But, I’d put some in to savings. Say you have $200 a week for your CC. Pay $100 to the CC and the rest goes to savings. Not only will you be saving money but you’ll be paying more onto your CC. Then before your year is up, pay what’s left on your CC and you’ll still have money in your savings.

    Now if only I could live by my own advice! LOL

  • Reply Brian |

    Pay off the credit cards. I don’t know what got you in the credit card mess to begin with, but sure enough some drastic event will cause to tap your savings & any interest that you earned to that point will be gone. Then at the end of your cc intro period you’ll be looking at a huge balance with a high interest rate that has been accumulating for months!! Play it safe & forget about making a little spread on the interest rate. Get out debt & get out fast.

  • Reply Mrs. Micah |

    I’d say pay off the credit cards. The savings account might make you a little interest, but only a little. Even if you’re getting 4.75% interest, it’s not worth it. On the other hand, by putting it into the CC, you’re guaranteeing your freedom little by little.

  • Reply Drew |

    According to the payment calculators out there, if you add $1000 a month to a savings account making 4.75% once a month for 12 months, you’ll wind up with about $300 in interest. Keep in mind that you’ll still be having to make minimum payments on the card during that time, so it’ll lessen the amount you can save.

    I’ve been a long time reader and I think you’re strong enough to save that money for nothing but CC payoffs instead of spending it. In which case, the $300 is certainly nothing to sneeze at. I say go for it!

  • Reply Penny |

    Haven’t you had enough of debt and playing with credit card companies and interest rates yet?? Just get out of debt. Fast. Be done with the credit cards. Don’t do what the credit card company wants you to do, which is being lulled by the 0% interest rate so that you still have a huge balance when the interest rate goes up.

  • Reply FinanceAndFat |

    I would pay off the credit cards. I know your intentions and plans are all great right now, but things can change. If you pay off the credit cards, they are gone for good! Think about how much you can save then. You don’t want to leave the door open for those credit cards to hit you with some new magical fee or other change to the agreement.

    I think you’ll feel better if you can see the debt number going down every month too.

    Also the interest you earn won’t be much and it is taxable income, so you gain even less.

  • Reply Sara |

    I would pay off the cards. For the same reason why you pay off the smallest balances first rather than paying off the highest interest rate – it’s a mind game you are playing with yourself, and seeing that balance stagnate will really become discouraging.

    But, in theory, it sounds really good!

  • Reply Kevin |

    How much credit card debt are we talking about there. I’m going to pretend you have a $10,000 balance since you can quickly convert that to your own situation. I also assume you were going to pay off the entire balance by the end of the year, so you would pay $833 per month.

    Most credit cards make you pay about 2% per month. So from a $10,000 balance you would pay $200 for the first month and it would go down each month as the total balance decreases.

    So the first month you would be able to save $633 and earn interest on that instead of paying the credit card company.

    On the last month you have the 0% interest you would have paid $2,400 in principle and saved $7,596 in your savings account. The interest you would have made from saving the $7,596 instead of sending it to the credit card company would be (assuming 5% APY) $209.

    Is $209 worth the risk if you forget a payment one month (the 0% would go to the regular rate) or forgetting when the offer actually expires (it is usually different than your pay day).

    I am involved in the 0% balance transfer arbitrage. But the key to this is having the lump sum at the beginning of year and earning interest on that large sum for the entire year. Putting a little bit each month into the account.

    To me the psychological thrill of paying off the credit card balance in one year is greater than $200 you could earn. Of course if you have a lot more in debt then maybe you would see some serious money come out of your savings account.

  • Reply Kevin |

    Oops forgot to finish that last sentence of the second to last paragraph!

    “Putting a little bit each month into the account almost decapitates the interest you could make.”

  • Reply paidtwice |

    I am in the same situation, and have had the same thoughts. My credit card debt is at 0% interest until September 2008.

    I’ve decided to keep paying off the credit card as fast as I can. I know that if I put the money in savings, something will happen and I’ll have to use it. And I won’t pay off the credit card in time.

    For me, the best answer is keep paying the credit card as fast as I can. For you it might be different. Good luck whatever you decide!!

  • Reply Ryan |

    If you were 100% sure you could pay off the credit cards when the interest rate goes off of 0%, I’d vote for saving the money in the meantime… but if not, then just pay it off and be done with them.

  • Reply Dory |

    Pay the debt.

    The answer is always: pay the debt.

    The answer should always be: pay the debt.

    With how wonky our economy is right now, you never want to bank on tomorrow. If you’re going to pay the money to the card eventually anyway, get it paid off now, and give it the time it needs to drop off your credit report.

    Good luck!

  • Reply Tricia |

    Thank you everyone for the replies thus far. Here’s what I’m thinking…

    Pay off the debt.

    I do believe I have the discipline to pay towards a savings account the amount I would be paying towards paying off the credit card. But there is a problem with that. If I have more savings and need some money, where is that going to come from? The savings account. If I didn’t have that money there, where is it going to come from?

    Credit cards can be there for an absolute emergency, but I can tell you that I will do my darndest NOT to use those cards. The money in savings would be too easy to spend.

    I am a very mathematical person, and I see the ability to make some interest income with putting the money into savings. But, I know how I am and how I want the debt gone. To see my debt ticker stuck near $20K for a year would depress me.

    Looking over the comments, that sealed the deal. I need to pay off the debt.

    I was fortunate enough to be able to get it all at 0% and saving money that way. I’m not going to push my luck further with letting it sit there.

    Thanks everyone!

  • Reply still paying |

    Tricia: I follow your blog and love it! Question for you…how did you manage to get all your credit cards to one with a zero percent interest rate? I am in a world of debt right now and am really struggling to keep up.

  • Reply Rob in Madrid |

    This is something that my wife and I have been back and forth on for a while. We have our debt snowball running and some (finally )extra money in the budget. On one hand we want to get rid of payments on the other it’s nice having cash in the bank.

    What finally tipped us towards savings was realizing that it wasn’t the payments that were killing us but a lack of cash when the cruch hit. For example when my Mum died this summer we had to fund the trip home (about 5000Γ’β€šΒ¬) we had very little cash to draw on so we had to take overdraft to pay for it. The rest rather than going to pay off debt is going into bank as an emergency fund. Had we had a decent emergency fund we could have probaly avoid borrowing money. Of course we would have wiped out our savings but that’s better than running up debt.

    The other reason why I want to focus on savings rather than debt reduction. is that thinking about our debts is rather depressing, on the other hand having cash flow and money is the bank is a really nice feeling.

  • Reply Rob in Madrid |

    After I posted I noticed that your debt has come down $10,000 in a bit over a year (your Flat Screen TV post) congradullations

    I also noticed that your savings stand only a a $1000 (5,000 would be more reasonable). That’s not lot of a cushsion if the furnace goes or the car dies or any number of things happen. No one likes having to draw down the bank account but it’s much better than the alternative which is having to use the cards.

    Secondly start now getting in the habit of having money in the bank so that when you finally debt free you don’t slip back into old habits.

  • Reply tlange |

    I would pay down the debt as fast as I could. I tend to agree with Dave Ramsey that small victories like debt elimination are huge in the big picture. Also, I think it is good to concentrate on one thing and that is debt elimination. Once your debt is eliminated, then you will have much more freedom to build your savings. Right now, you are torn between two options, pay debt or save. I know that what I said might not be logical, but as Dave also says regarding personal finance, that it is 90% behavior

  • Reply ms. m&p |

    Hmmm. This is a tough one. I’m in debt too and if this were my situation, I would just keep sending chunks of money to the cc debt because I hate having the revolving debt and part of what keeps me motivated to pay it off is the happiness I get from each big payment I make. That said, the most economical thing to do is clearly to put some money in savings and let it appreciate (as long as you’re certain you can pay it off before the 0% period ends).

    I think other commentors have made excellent points about not knowing what the future will bring–I pay down as much debt as possible now because I know I can. Who knows what could happen in the next year? But, when you don’t have a cushy EF (I def don’t have one), you’re pretty much one emergency away from more cc debt anyway…so I think in the end that argument is all a wash.

  • Reply Anonymous Reader |

    I think you lost a lot of flexibilty in dealing with the debt by lumping it all into one account, even at zero percent. You paid off $10,000 last year, but at that rate you will have $10,000 left to pay off at the end of the zero percent period. This forces you to maximize the payment on the debt to avoid the 15 percent monster.

    If I were in your situation, I would look at increasing my emergency fund to cover most major automotive and household emergencies, around $2,500 to $3,000. I would add to the $1,000 at a rate of $250 to $300 a month until I reached that level, putting everything else toward repaying the debt.

    However, your debt problem is exacerbated by your lack of income. Your debt would disappear in just a few months if your household income increased a net $1,500 a month. I still don’t see your husband contributing a reasonable amount to the household income. Instead of you making many small sacrifices to save $100 a month, he needs to make a bigger sacrifice and get a full-time job. If he has to drive 60 miles, that’s part of the sacrifice. He can work on his business ideas on the side, at least until your debt is paid off and you have a generous emergency fund, like a year’s worth of living expenses.

  • Reply Patrick |

    A nice plan of action would be to add a little cushion to your savings while continuing to pay your credit cards. Because you have consolidated your cc debt, you can maintain a minimum payment for a couple months to aggressively add to your savings (to build up your emergency fund, etc.), then when your emergency fund reaches a good level, you can be more aggressive in paying your cc debt. This allows you to meet both goals and should still give you piece of mind. Congrats on getting the 0% balance transfer – this should save you a lot of money! πŸ™‚

  • Reply Marie |

    I would be on the fence too. Some things to consider 1) due to problems with fine print and their desire to gouge you I would pay off the balance at least two months early. 2) could you do half into savings and half into debt repayment? 3) do you have enough self-control to use that money only for debt repayment. I think the answer probably lies mostly in do you trust yourselves to use it to pay off the debt in the end.

  • Reply Jen |

    How much were you planning on paying towards the credit card each month? And were you planning on paying it all off by the time the 0% period ended?

    If you were not planning on paying it all off ($19,990 is a lot to pay off in a year!) but just wanted to make a big dent, then I would consider putting some in the savings account to help you with unexpected emergencies. Maybe take the amount you budgeted towards debt and split it 90/10 or 80/20 – 80% of that amount towards the credit card, and 20% towards savings. This way you’re paying down the debt, but hedging against using a credit card for emergencies.

    Not a perfect solution by any means, but perhaps the best preparation for an uncertain future.

  • Reply Tricia |

    Jen – at this point, I am very uncertain how much extra can be put towards our credit cards per month. I started working on a preliminary budget yesterday (actually – it’s the first actual budget I’ve ever done). I still have to make sure I have EVERYTHING accounted for, including those pesky quarterly and yearly costs. I’ll know more after that is finished.

    I do want to beef up our savings more than $1,000. I’m just not sure how much we can do.

    As for paying off $19,990 in a year, we won’t be able to do that. We just found out that my husband didn’t get that good job he applied for πŸ™

    At least now we know and we can go from here. It took them 6 weeks to let us know something.

  • Reply FinanceAndFat |

    Tricia- sorry to hear the bad news on your husband’s job application. Just stick with it! I made a career change about two years ago- from a job I hated to work that I truly enjoy. It wasn’t easy though. I was rejected at least three times and things started to look bleak- then a new job listing came out, I applied, got hired in the next week and they offered me more money than all the other jobs I had been rejected for. You never know when something is out there, right around the corner, that will turn things around.

  • Reply Ellen |

    I did just what you are talking about. I had 10,000 in CC debt. I put it all on a 0% card. I paid the minimum each month and put the rest in my ING account. A month before it was up I took out the money and paid off the debt. I now have no CC debt. I am single so it was just me I had to worry about. I knew I would do it. Another thing is I DID NOT activate the card. This way I could not use it. I didn’t even take the card out of the envelope it came in. It worked for me but I can see how you could easliy spend the money. Maybe do half in your savings and half on your card? I also know it feels great to just put it on the credit card and watch the numbers go down. But puting it in the saving account and watching it grow with the interest is great too. Then when it is all done you will keep putting it in savings. Just do what works for you and makes you feel the happiest.

  • Reply allthingsgood |

    Myself, I’d pay off the debt, just like if I had a tumor and was suddenly given a scalpel, I’d slice it off, not use it to carve up dinner. Okay, poor analogy, but I hate debt so bad I would pay it off. For me, if I have a little debt, somehow it quickly becomes a big debt, so I try continuously to extinguish any debt I have. Debt is the enemy.

  • Reply Anonymous Reader |

    I’m sorry, but I don’t understand why your husband waited six weeks to hear from one job application. If I were in his situation, I would apply for at least one job a week, and two or three if I could find the openings. Even if it meant taking a low-wage boring job, at least I would be contributing to current expenses and paying off the debt.

    It seems like you are the only person in your family focused on the debt. If paying off the debt were really important to your husband, he would do what it takes to get rid of it.

    I applaud you on the budget, but I reiterate that squeezing out nickels and dimes won’t cure your cash flow problem. Increasing the family income will solve that. You don’t have a spending problem, you have an income problem.

  • Reply arduous |

    I completely understand why you are going to pay off the debt, and I understand why pscyhologically it makes the most sense. I will say this though. During this time, maybe you can at least put in a little more in your savings so you have more of a cushion…?

  • Reply Janelle |

    I would follow the Dave Ramsey rule. Put $1,000 in savings and put the rest towards the debt. Yes you could earn 4.5% on that money but the chains that will fall off of you from having paid more debt down is way more worth it.

    I’ve been reading your blog a long time – I can’t wait for you to hit the big $0.00!

  • Reply Kevin |

    Purely in terms of dollars and cents the sensible thing to do is to pay the minimums and put the rest into high interest online savings.

    However, I think you will derive much more satisfaction using that money to pay down debt, since it is your primary motivation.

    Do whichever one will help motivate you the most.

  • Reply Single Ma |

    Despite what the math says, I’d definitely pay off the debt – no matter what. I’d apply ALL extra resources to make sure the debt was gone before the 0% ran out. Otherwise, the purpose of the consolidation becomes null.

  • Reply Tim |

    first you should consider what got you into the debt in the first place. second, what does your budget look like. Third, what are your fundamentals? Are you going to be tempted to spend the money while it is in savings? People say oh no they won’t, while actually doing so. It’s a risky game (credit card arbitrage) if you do not have the fundamentals in place and have the tendency to spend out of your budget; moreover, one missed payment or late payment can immediately send you into the high interest rate to include accrued or not.

    I would work backwards, and evenly pay off over the next 12 months where it is interest free. This gives you the advantage of earning some money, while still not holding the entire debt until the last month. Again, I’d only do this if you have financial self-discipline; otherwise, pay the entire amount off as quickly as possible. The only caveat to paying off as much as possible, is that you should give yourself some breathing room. Build up an emergency fund in the process; otherwise, you may have tapped all your left over pay into the credit card debt while something happens that needs to be paid for.

  • Reply Julia |

    Pay off the debt! Sure, having savings is always good, but since the debt is the albatross around your neck, I’d be paying that off as quick as possible. The 0% interest is allowing you attack more of the principle instead of paying off interest + principle, which lengthens your debt repayment time. Just my two cents of course, but since you asked. πŸ™‚

  • Reply Karen |

    Tricia, I think it is interesting that you asked what everyone else would do; and most people responded with what YOU should do! Just human nature, I guess….

  • Reply angiebaby |

    What would I do? I would get an extra job – for both me and my husband. I realize you live “up der in dah U.P.” -maybe have your husband work on saturday and you work on sunday so that you don’t have to pay child care. Before taxes – if you worked 8 additional days a month at the minimum wage of $6.50 – you’d have an additional $432 before taxes.

    I’d also babysit at night for cash and maybe start a snow shoveling service.

    Finally, I’d ask my local priest or pastor to see if I could have a bake sale in the hallway after church. These are a just a few ideas but like I’ve said before…….there’s always Minneapolis or Duluth for higher paying careers…… πŸ˜‰ Keep the Faith!

  • Reply BradM |

    My wife and I have $20,000 at 4.75% and $10,000 at 0%. We easily earn 6% in our savings account and have decided to boost savings. And delay paying off these debts. (We decided this a couple months ago) I feel like we are drudging along not making much progress on getting rid of our debt. The math makes sense, but we could easily knock out this debt in a couple of years. I’m debating the latter right now or at least paying more each month!
    PAY OFF THE DEBT! You’ll feel better, I’m convinced!

  • Reply rstlne |

    Make sure you have enough stashed away in your emergency fund and then pay off the debt. You’ll earn some interest in your emergency fund and at the same time you’ll make progress towards reducing debt before the interest rate kicks in.

  • Reply StaciCarsten |

    My personal strategy (which many wouldn’t agree with!) is to keep the credit cards paid off and consider them my “emergency fund” rather than having a small savings account for emergencies.

  • Reply Tim |

    i am not a fan of credit cards as an emergency plan. the last thing you want is to take on debt when you don’t have a source of income or your income has been reduced (i.e. an emergency). the emergency fund acts as a buffer, so you do not have to take on debt or reduce your other savings (like retirement or education) in order to pay for an emergency. The last thing you want when you are in debt and trying to pay off debt, is to go further into debt because of an emergency. Yes, you freed up some credit line by paying as much debt as possible, but you will go quickly backwards if you rely on the credit again to fund an emergency.

  • Reply Jen |

    I’ve been reading your blog since I first heard about it on NPR. love it…with that said, my advice is to continue to pay down the balance now. I say this for a couple of reasons:
    1. The amount of interest you are going to earn is not much..say 4.5%. BUT you don’t make 4.5% of the total amount you will save b/c you are making small deposits each month. 4.5% is an annual interest rate, but broken down into an anninuty calculation and it’s not going to be worth the delay in paying down the debt now.
    2. If anything happened and you lost your 0% you would have a large balance again…a year from now you don’t want to face the same set back.
    3. Your thinking is right-on, but unless its a one lump sum earning a decent interest rate(say a money market) the cost/benefits weigh in favor of paying down monthly.
    Good luck!

So, what do you think ?