When Should You Pay Down Credit Cards Instead of Building an Emergency Fund?

Emergencies happen sooner or later, and whenever possible, it’s a good idea to build up an emergency fund so that you’re prepared to handle them. It’s not uncommon for consumers to be faced with an emergency, and to rely on credit cards to handle unexpected problems when they come up. Building an emergency fund can be challenging when you’re already dealing with credit card debt. When should you pay down credit cards instead of building an emergency fund?

The best approach whenever possible is to do both. If you’re unable to build an emergency fund, you’ll continue to rely on credit cards, so the ideal situation is to budget some of your money to go to savings and some of it to go toward paying down your debt. Certain situations make it important to prioritize paying your debt over saving money.

Pay Bills on Time

While it’s important to prioritize saving money whenever you can, if you’re already in over your head in debt, it’s very important that you pay at least the minimum amount due on or before the due date. You should never skip paying a bill to put money into an emergency fund since one missed payment shows as a negative mark on your credit report and stays there for seven years. You may also be charged a late fee or have your interest rate raised.

As long as you’re paying all your bills on time, some experts suggest that you should pay only the minimum on credit cards until you’ve built up a cushion in a savings account. Put any extra money you have into savings. Start small, with just $10 or $20 per paycheck, to get in the habit of saving. It’s especially important to have money in savings if you feel insecure in your job situation.

Consider the Interest Charges

The best way to utilize credit cards is to pay back whatever you borrow in full before you’re charged interest, but if you have to carry a balance, there’s a good chance you’re paying a high-interest rate. If you’re in this situation, any extra money you have should go toward paying down your debt. The sooner you’re able to pay it off, the less you’ll spend on interest charges. You may be able to reduce the amount you pay toward interest by consolidating credit card debt into a personal loan or by transferring it to a new card that has an interest rate of 0% for a year or longer.

Protect Your Credit

Be proactive about your financial picture by making sure your credit report is accurate. Inaccurate information on your credit report can bring down your credit score and make it harder for you to borrow money at a reasonable rate. Dispute any errors you find as soon as you can. 

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