Build Emergency Fund or Pay Down Credit Cards?

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Here’s a tough question I got via e-mail, paraphrased:

“I finally got a stable job. I have $9,000 in credit card debt, half at 12.99% and half at 8.99% APR. I have no emergency funds at all, that is why I have so much debt. Should I pay down the credit cards or should I build a backup money fund? Do you think I should apply for more credit cards to lower the APR?”

This was in response to my Emergency Fund options post. As I am not the best person to ask about getting out of credit card debt, I’m throwing this out there for feedback. Here’s what I have off the top of my head:

1) Call each credit card company up and ask if they can lower your rate. It doesn’t look like you are at a default rate (usually greater that 20% APR!) so you are paying your minimums at least. Tell them you are going to balance transfer the debt elsewhere otherwise.

2) I am not personally familiar with any debt reduction services. My take is that there are some good ones, mixed in with a lot of shadier ones. Proceed with caution as always.

3) I can’t tell if your credit is good or not. You may be able to transfer your balances onto a 0% APR card with no fees if your credit score is decent. I’ve definitely gotten cards with $10,000 of existing credit card debt, but my credit was pretty good to start with. This may sound weird, but I’d also keep an eye on your junk mail. You might get a nice 1.99% APR or 2.99% APR offer or something. Theoretically these companies pre-screened you at least a little before sending out the offer, although ‘pre-approved’ does not guarantee approval, paradoxically.

4) After you’ve gotten your best rate possible, I’d compare it with prevailing savings account rates. You can get 4.0% APY pretty easily, but remember that savings account interest earned is taxable, while credit card interest paid is not tax-deductible. For example, if you’re in the marginal 25% tax bracket that 4% APY ends up being 3% actual cash. Therefore, if you can get your credit card interest rates under 3% APR, definitely go build that Emergency Fund first.

5) If your credit card rate is higher than 3%, then you’ll have to do some thinking. Some people say to build an emergency fund first no matter what. Other say why bother, you can always just charge up your cards again later, so pay off the cards first.

I think you have to consider – How stable is your job? Are you on probation? Is your car dependable? You need to gauge how likely it is you may need that cushion. I would probably save up some cash while I am on job probation, and then switch to paying off the cards. Then your job can’t fire you for no reason, and if you do get laid off you should be able to get unemployment. (Note: I am not 100% sure this is how probation and unemployment works.)

So what do you readers think? Emergency fund? Credit Cards? Lotto?

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  1. I had the same question thrown at me last week and this is why I think paying down the credit card debt is the way to go. Of course, the first step is to make sure you have addressed the problem or issue that casued the credit card debt in the first place or it will continue to show up…

  2. it really depends on his situation.. but I think for the majority of ppl, and with the info provided.. I would pay off the credit cards first, then save up for emergency fund.

    if he can get lower rates, go for it. it depends on his credit, but… if you do the math, in the long run paying off credit cards first -> then funding your emergency savings, will be the better course.

    if he steadily puts the extra money (that would have gone towards the emergency fund) into the credit card debt, even when an emergency happens, and he pays for the situation with the credit card, he would come out better in the long term in terms of money saved.

    assuming you can pay for the emergency with the credit card, of course. regardless, my pick is the high interest CC debts (even if he transfer them to lower rates).

  3. great, as I typed it up, pf already responded with a shorter, better answer.


    btw, I’ll stay clear of deb reduction/consolidation services.. there are some okay/”good” ones out there I think, but from what I read.. it’ll be difficult getting credit later.

  4. I’ll add this too: While credit cards can pay for a lot of stuff, cash-advance limits tend to be a lot lower than credit limits, and I would think the two largest expenses for many people, rent/mortgage and car payments, usually require cash.

  5. yeah if the emergency cant be paid with the CC, then a cash advance will be a rough deal. not to mention the higher interest rate usually found on cash advance. plus when you begin to start paying off the CC again, the payments goes toward the lower interest balance first…

    I use to debate about the cash fund vs CC debt deal too, but I went with paying off the debt. I still think that’s the way to go for most people.

    good post!

  6. Since their CC rates are at or below the averages, according to, it would be unlikely to get them lower, IMHO. I agree that since they are below 20%, they are not the default rate and thus they have been paying the minimums on time.

    Since the prime rate is over 4%, I believe, getting them below that level, teaser rate not withstanding, is highly unlikely, I’d say pay down the CC first. Paying down the CC will give you a 9-13% return, i.e., not paying the 9-13% interest. Then you can earn ~4% on a high-yield savings account.

  7. agree completely – try to pay off the CC debt ASAP.

    Of course, needless to say this all means stopping using the credit card completely (unless there’s an absolute emergency) until it’s paid off. I’d even stay away from it after you get it paid off while you’re building up the emergency fund. Then, looking a bit in the future, every time you have to tap that emergency fund to pay off a month’s CC bill on time, put the card away again until you’ve replenished the emergency fund.

  8. I would save $500 or $1000 first to avoid having to get a cash advance. Then pay of the CC debt with furious force. Then build up a normal emergency savings with 3-6 months of expenses. But like the previous poster said, you need some discipline to stop using the CCs.

  9. I know im off topic..but how do you create sub accounts in ING?

  10. There are a lot of problems and things we don’t really know about this situation. I think first what needs to be addressed is how much can he afford to save/pay off debt? If it’s $10 a week, he’s better off saving (in case of emergency) – again if he has zero savings.

    Another big question is – does this person budget, and what kind of fluctuations (or accomodations for) do they have with the budget? If the credit debt came from issues of spending to much because of the plastic vs. cash problem, then I would of course highly suggest nothing be paid on the credit card unless absolutely needed.

    You could also when getting a figure of what you’re looking to spend do a split 80/20. Meaning if you can pay off an extra 100 max, you pay off 80, save 20; or change it up as needed. Each and every situation is different, and without the knowledge behind what caused the credit card debt and all, it’s hard.

  11. Whenever I hear this question, I always reply…why not do both? Take a look at your spending habit…see what you can eliminate and use that to save.


  12. 3 years ago we were in the same situation. Except we had close to $25,000 in CC debt and no savings.

    We were finally able to start getting ahead with a new job. That only allowed us to stop using CC completely and just make the minimums. Most of our rates were high also. We ended up going with a debt consolidation program. This for us helped a lot since our minimum payments dropped ~$300/mth. I would only recommend this though as a last ditch effort.

    We also got rid of one of our 3 cars and shopped around for cheaper auto insurance. That freed up another $400/mth.

    After a 2 years we were down to about $20,000. Though we were still having trouble putting any money away anywhere. After that I got a new job that helped a lot. We then severed our contract with the debt consolidation company. Then in the last year we have paid off another $8,000 of the CC debt. We recently transfered another $5000 of the remaining $12,000 to 2 0% APR for 12 months CC’s. This will be paid off 5 months into the special rate. On top of paying that much off in the last year we also were able to buy a house and have over $16,000 in various forms of savings.

    We are using CC’s again but they are paid off every other Friday. That and since they are reward cards that is a little back to us each month.

    I know there might not be much help in this post but there is a lot of hope in it to let you know it is possible.

  13. I agree with paying off the credit card first. Even if you could negotiate the rates on the credit cards down to 5% (unlikely), you shouldn’t put your emergency fund in anything more volatile than a money market, which are currently running just under 5% anyway. I’m currently writing a blog series on budgeting on my site if you are interested in more information.

  14. I’m all for paying off CC first, unless of course you could transfer it all to a 0% card.

    However, I think the real issue here, is that people think spending money from a CC is somehow different than writing a check, or pulling cash from your wallet. If you need to, keep a daily transaction log of your spending, and compare it with your bank balance, just as if you had written a check. Don’t let the billing cycle trick you into thinking you never have to pay it.

  15. I prefer to have around 2k in easy-access savings for emergencies while paying off the cc debt, I refuse to increase my credit card debt by using it for emergencies. Currently I save $175/month while putting $550 to the debt and am 2 months away from 2k. Once I have the 2k saved up, everything that was going into savings now goes toward the cc as does every extra penny I can find. Once the cards are paid off, I would like my readily accessible savings to be around 5k for emergencies, once that goal is met I start stuffing every dollar I can find into my less-accessible higher-yield accounts for my retirement nest egg. As soon as my cards are paid, I’m closing all but my oldest card which will be hidden away so I can’t use it.

  16. stackbacks says

    Pay off the cc first.

    Make sure however that you have your spending under control. Create a budget to go along with your cc pay offs.

    You’re not going to run into that many “emergencies.” If you do, oh well, you needed the money and your budget will keep you on track with your goals.

  17. Do your best to pay off the credit card first.

    I know that paying off your credit cards makes the most sense and is the least expensive way of doing it (which may very well be the WHOLE ENTIRE POINT), but you have to do whatever works for you. Because I know myself better than anyone else, I chose to do it a little differently.

    I chose to go ahead and start saving, at least some small amount, at the same time of paying off my debt. The good news here is that by the time I’m totally debt free, I’ll have some of that emergency fund saved up, and I expect that I shouldn’t really have to ever use my credit cards again.

    You do want to make it as easy as possible to pay off that debt, so do yourself a favor and look for a lower interest card, ask for a lower interest rate, and pay off the card with the highest interest rate first while paying only the minimum on the other. Then redirect focus to the lowest. This can save you hundreds and considerably shorten your total time in debt.

  18. What are some reliable debt consolidation companies? What is their associated fees and rates? Do they charge a upfront fee or are there any prepayment fees?

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