I received a question from reader Diane the other day as follows:
“My husband and I have a $5,000 balance on a credit card that is at 0% interest for another 8 months which we have been paying down slowly. However, carrying debt in this economy has us scared, so we are thinking of emptying our emergency fund to pay it off, which would leave us with no cash but also with no credit card debt. Do you think we should do that? Or do you think we should continue paying what we can on the card and then maybe pay off the balance at the end of the interest cycle? If you have any suggestions, would love to hear them. Thanks.”
Well, Diane, that is a good question – and not a bad problem to have, really. Not only do you have your debt on a 0% interest credit card (which I am a big proponent of if you have debt), but you also said you have a $5000 emergency fund, which is great as well. You are way ahead of many people out there who have both debt on high interest cards and no emergency fund, so this situation gives you some options – always nice to have. Now, for my thoughts on this…
For me, in this economy, I would want to have some cash on hand. I understand that you feel the burden of your credit card debt, but you have to realize two things:
1. That your debt is currently at 0% interest, meaning you are not paying a dime for that borrowed money.
2. You might need cash to buy something somewhere down the line as the credit market tightens up.
You said that your debt does not “come due” for another 8 months or so, so you could always pay it off then or maybe even roll it into another 0% interest card. If the economy was strong and things seemed stable, I would recommend you pay off the debt with your emergency fund right away and then start rebuilding your cash reserves. And if your debt was not at 0% but rather you were paying interest on it, I would recommend you pay it off asap. But in this economy, I would feel more comfortable having some cash on hand, even if it meant I had a little debt running at 0% interest. If you lost your job and could not get any needed credit, what would you live on? The cash you kept on hand. If grocery or gas prices spiked, how would you pay the difference? The cash you kept on hand. For me, if I was in your situation, I would leave the debt at the 0% interest, keep making payments, and leave the cash in the bank. When it comes due, you can re-evaluate your situation. Hope that helps a little, Diane! What do you guys think? Do you have an opinion or some advice for Diane? Let us know in the comments!
Please keep in mind that I am not a financial professional – this is just my opinion and probably what I would do if I were in your shoes. If you are very concerned about what you should do, you should think about talking to a finance pro.