Reader Question – Keep Emergency Fund Or Pay Off 0% Balance Transfer Credit Card?

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.

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Comments (16)

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  1. Miranda says:

    I agree with you, Dave! I think that in this time, it is important to be prepared for future unpleasantness. If there is a little extra in the budget, maybe she could apply that to the debt on top of the minimum payment, remembering that for the next 8 months every penny goes to principal. But keep the cash reserves.

  2. Broke MBA says:

    I think your advice is spot on. I would prefer to have cash in the bank in this situation.

    I have a $19,000 student loan bill and my goal is to pay this off in 2009. Even though I may lose a little bit in interest, I will be saving these “debt payments” in a separate savings account until I reach my $19,000 goal. Once I achieve this balance, I will evaluate my situation and factor in things such as the economy, the stability of my job etc. before giving up my cash to the student loan bill.

  3. I would also keep the cash. Not having an emergency fund scares me way more than a 0% credit card balance.

    I have about $7,000 on a 0% credit card and it’s staying right where it is. We are paying about $200 a month to it and will continue to do so. When the 0% is up we will take it from there. But until then… “thanks for the free money!”

  4. Anthony says:

    I strongly would recommend NOT paying off the credit card because banks are lowering credit limits, even for borrowers with good credit. By having an emergency fund, you remain (somewhat) in control of your finances, having options in the event of an emergency. If you pay off the credit card, and they decide to lower your limit (or worse – close the account, which they are also doing), you will be left with no resource for emergencies.

    If you do not have a total financial game plan which includes paying off all of your debts (including your mortgage), you really need to consider your options.

  5. Saver Queen says:

    I think the advice that was given was good. Hang on to the emergency fund. However, watch your interest rate and be prepared to pay it off if it changes!

  6. […] My Two Dollars – Pay Off Credit Card Balance Or Keep Emergency Fund […]

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  10. Pete says:

    I would personally keep a $1000 emergency fund, and then use the rest towards the debt. Whatever is left over just get intense about paying it off, and it’ll be gone in no time! Then you can start stockpiling cash again!

  11. erika says:

    I have exactly the same amount of cash in my ING account, and i do the same thing with my0% debt. i think this is the best bet for now.

    Agreeing with ya Dave

  12. Nelson says:

    Sorry guys, but I have to disagree. The point is made that the reader needs to have cash on hand just in case of an emergency. But the reader will have a credit card just sitting there, without a balance, just waiting to be used.

    If the credit card company decides to cut their limit big time (which, btw I think is EXTREMELY unlikely) they can just find another 0% card to use. I’m guessing it won’t be that hard.

    I don’t understand the point of having a whole bunch of cash on hand when a credit card can handle just about any emergency that’ll come along. Worse case senario puts them back where they are now. Big deal.

    It sounds like Diane places a very high value on being debt free. Why not encourage her to do so, just so she can sleep a little better at night?

    This is an interesting topic though. I think I’m going to do my next post on it. Come check it out.


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  14. Heidi says:

    Great article, I linked to it at my site 🙂

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  16. Kira says:

    I know this is an old post, but I’d like to weigh in. I think I’m more w/ Pete and Nelson. Keep $1,000 in an emergency fund and pay off the rest. People are doing all sorts of irrational things because they are scared right now, and there are always ways to trick your mind into thinking you have more $$ than you really do.
    I would tell Diane that if she has a job, and doesn’t like the idea of having that debt around (albeit at 0%), then pay it off. If something comes up, she’ll find the money somewhere else (cut back on expenses, sell stuff, etc) and still come out better off on the other side.
    In this economy, there’s nothing that makes you feel more in control of your life than not violating your own values. I recently closed my oldest line of credit (Citibank) with a $15,000 credit limit because I didn’t like the fact that they took (and abused) so much TARP money. I’m sticking my loyalty and my $$ where my values are. (Yes, I bank with USAA.)