Ask the Expert: Common Debt Pay-Off Questions

Debt pay-off questions answered by Laura Walton

Laura Walton is an Accredited Financial Counselor® and the Executive Director of TCI Foundation, a privately funded nonprofit created to give people no-cost, unbiased financial education and one-on-one advising through its College of Personal Finance and Financial Stewardship Program.

Ready to pay down your debt? Read on for some dos and don’ts:

Question: Should I transfer my credit card balance?

Answer:You may get offers to transfer a balance from one card to another at a special low rate. The fee is usually small, and it’s definitely easier to make headway paying zero percent interest, so should you do it?

“It's often a good option,” says Walton. “But not if you haven't changed your spending habits. That's the catch.” In Walton’s experience, too many people move debt from card A to card B but continue overspending, and before long, they owe money on both cards.

Also, if you want to do a transfer, don’t just choose from what arrives in the mail, she says. Shop around for the best deal at sites like Card Hub, Credit Karma, or NerdWallet.

Question: Should I build up emergency savings first?

Answer: Many advisors suggest you have money for three months of expenses stashed away for emergencies, but building that savings takes time.

If you’re carrying a balance on a general-use credit card, Walton suggests paying that off before trying to save. The credit you free up as you go is as much a safety net as money in the bank, but assuming you don’t have to use it, you’ll save more in the long run.

Also consider your overall safety net. If you know, for example, that family members would pony up a loan in a true emergency, you can attack your debt before saving. If that kind of help isn’t realistic and you don’t have available credit to fall back on, consider splitting your plan between debt and savings.

Question: Shouldn’t I be investing?

Answer: Walton says: “The quickest way to make money is by paying off debt.” That’s because if you pay $100 on a debt with a 15 percent interest rate, that’s $15 you won’t be paying in interest. Try matching that guaranteed rate of return in the stock market.

There is, however, one exception to that rule: a retirement account, like a 401(k). Because retirement accounts aren’t taxed, they automatically earn a return instantly, and if your employer does any matching, that’s more free money. Either way, the compounding power of early retirement saving is mind-blowing.

Based on these unique opportunities, Walton offers this food for thought: If you have access to a 401(k) with employer match, consider splitting your extra income between the two and gradually shifting more toward retirement as your total debt shrinks.

Question: Should I cut up my credit cards?

Answer: In a nutshell, no. The fact is, you may need them at some point, but making cards hard to get to can help if willpower is a problem, Walton says. You might give them to friends or family to hold for you. In an extreme case, Walton had a client freeze credit cards in a big block of ice to keep from using them. The few hours it would take the ice to melt are usually enough time to “cool off” whatever spending urges come up.

Question: Should I close my accounts as I pay them off?

Answer: No. Doing so can lower your credit core. Pay them off, then leave them alone.

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