When individuals are faced with credit card debt, they sometimes get a little creative in coming up with ways to swiftly eliminate this problem. And we always find it a bit ridiculous when people look for various other ways to pay it off rather than using funds from a savings account. While we fully understand the reluctance people have over accessing this money ? especially if it?s designated for a specific or important purchase ? most of the time it?s arithmetically boneheaded not to use it. The negative stigma of dipping into savings, however, prevents many people from making logical financial decisions when dealing with substantial credit card debt.
Before we take a closer look as to why you should pay off your credit cards with the funds from a savings account, let?s first look at the few places in which you shouldn?t extract money.
First, never pay off your credit card debt with a retirement account such as an RRSP (or Roth IRA in the United States). These funds typically impose penalties for earlier withdrawals, plus withdrawals before maturity can drastically gouge the value of the account in the long term.
Second, while some financial experts say this is a strategy worth considering, we wouldn?t necessarily recommend using a home equity loan to pay off credit cards. By some calculations you could theoretically use the loan proceeds to pay down your debt by trading something like a 20% interest on your credit card(s) for a 6%-7% loan on your home. However, refinancing unsecured debt with secured debt isn?t really a fantastic plan. The overall goal of a personal debt reduction should be to minimize risk and offering your house as collateral against unsecured debt just to save a few points of interest increases the downside risk immensely. To better illustrate this risk, let?s look at worst case scenarios: The worst case scenario in failing to pay off your credit cards is an unfavorable credit rating (and of course the financial consequences of having this negative rating), however, the worst case scenario in defaulting on a home equity loan is losing the home itself. Plus, to a greater degree than defaulting on credit cards, you?re credit score also crumbles as a result. Therefor, we?d always risk defaulting on plastic before defaulting on your home ? even if interest rate exchange is tempting.
Paying off Credit Cards with Savings:
This should be your go-to move in today?s economic climate. The annual percentage yield provided on a savings account NEVER warrants a decision to keep it locked in rather than using it to eliminate debt. Especially today when typical money market accounts aren?t even able to churn out a 1.0% return, keeping money stashed in these financial vehicles isn?t practical when your credit card debt is accumulating at a rate of 18% annually.
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Source: http://canadianfinanceblog.com/allocating-funds-to-fight-credit-card-debt/
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