Your Credit Card Interest Rate and Your Savings Account

Posted on July 7, 2008. Filed under: -- Building Wealth, -- Investing | Tags: , , , |


By Molly Greaves

So what is one to do if they have credit card debt, but want to start saving too? 

It comes down to your interest rates. I mean the interest rates on all of your credit cards where you have debt (aka owe a balance), and also the interest rate you’re receiving from your savings account.

Although I do not recommend this, I know people do this, so I wanted share how to best tackle this if you’re about to. 

If the interest on your credit cards is lower than your savings account, then you could pay the minimum required against the debt on your credit card, and put the rest into a high interest yield savings account (do not spend it). But, if you’re interest rate on your credit cards is higher than your savings rate will pay you, then by all means, get that card paid off. I still have the mindset though to not try and juggle around like this with credit cards. Credit card companies are risky to do business with. The rules seem to always be in fine print.  A sudden change in your credit score could unexpectedly spike your rate and most people dont know that. Yep, if your card does a new inquiry to your credit, and things have changed, you betcha your rate is subject to change.

By all means, make sure that if you do this, that you have enough money saved to pay off your card balance once your interest rate rises above your savings account. 

How do you do that? Don’t spend the money from the beginning. Instead, use it to make some “capital gains,” and that’s it.

I use this theory with my student loan. I was so fortunate to be able to finance my tuition bill at the interest rate of 2.85%. I consider that one of the cheapest loans you can get, and practically free money. I mean, it’s lower than inflation! Not that my bill is free, because it sure isnt, but the loan seems almost like free because of the low rate. So, instead of rushing to pay off my huge college bill, I  send in only the monthly minimum needed to satisfy my agreement and keep my credit score in good health. Whenever I have extra money, I certainly dont send it to my student loan. Instead, it goes to my Roth IRA, where my chances are more likely to get a higher return on my money than by making the small progress on my college bill. 

**If you do this with your credit card, make sure you’re always checking in to see what your interest rate is so it doesnt backfire on you. Also make sure you have enough saved to pay off your balance when the rate is expected to go up. Double check your rates on both accounts frequently because they both can fluctuate. DO NOT spend the money that you are putting into your savings instead of using toward your debt/credit card balance. You want the money to be accessible once your credit card rates start going back up. Chances are they will. What you do instead, is come out with some “capital gains” on the short “loan” for your money.

Molly    greaves.molly@gmail.com

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