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If I have a couple K in money market savings and even more in credit card debt, does it make sense to take from the money market, at the expense of a safety cushion, to pay down credit card debt? I know I may sound foolish, but I almost think that the available credit limit that will result will function in case of an emergency. My thought is that, if an emergency were to come in 4 months, I at least would have had 4 months of less debt interest before possibly needing to put debt back on the card. Am I a fool or wise? (be nice.)
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Ed,

I recently went through the same mental exercise... I don't have the safety cushion I would like, but I also have credit card debt. I have been splitting my payments between credit card debt and a savings account. One day a better solution came in the mail (this is sounding like an infomercial). I qualified for a 0% credit card offer until March 2002. I transferred my balances (no fees) and began putting all my money in the savings account (5% interest). Next March I will withdraw the required amount and pay off the credit card debt. The remainder will serve as an emergency fund.

I'm not sure that this helps you, but I thought you might want to hear one solution.

Jeremy
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If I have a couple K in money market savings and even more in credit card debt, does it make sense to take from the money market, at the expense of a safety cushion, to pay down credit card debt? I know I may sound foolish, but I almost think that the available credit limit that will result will function in case of an emergency. My thought is that, if an emergency were to come in 4 months, I at least would have had 4 months of less debt interest before possibly needing to put debt back on the card. Am I a fool or wise? (be nice.)

This is a good idea IF you do not add new debt.
If you can pay for all of your monthly purchases when you get the bill then go ahead and pay it down.

I would keep some cash.



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If I have a couple K in money market savings and even more in credit card debt, does it make sense to take from the money market, at the expense of a safety cushion, to pay down credit card debt? I know I may sound foolish, but I almost think that the available credit limit that will result will function in case of an emergency. My thought is that, if an emergency were to come in 4 months, I at least would have had 4 months of less debt interest before possibly needing to put debt back on the card. Am I a fool or wise? (be nice.)

This is such a close issue that it USUALLY ends up being decided more on an emotional basis.

In a strictly long-term financial sense, it would be better to use your available credit as your emergency fund. As you say, even if you do have an emergency, you were paying LESS interest for a while.

However, if you then have an emergency, you get to watch your credit-card balances go the wrong direction. Just how disheartening will that be TO YOU? (And to your SO, if any.) If you'll sink into depression and go on a shopping spree, or just give up, that would be seriously bad - bad enough that the risk justifies keeping a few K in savings at 4% while you still owe credit-card debt at 14%.

And of course there is also (always) a risk that the credit-card companies will start closing your accounts for no obvious reason.

I would say that if your money market savings are equal to two or three months income, that's ENOUGH of an emergency fund FOR NOW - unless you're working in a highly seasonal industry or have other good reason to doubt that your income is stable. Throw savings BEYOND that at the debt.
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If I have a couple K in money market savings and even more in credit card debt, does it make sense to take from the money market, at the expense of a safety cushion, to pay down credit card debt? I know I may sound foolish, but I almost think that the available credit limit that will result will function in case of an emergency. My thought is that, if an emergency were to come in 4 months, I at least would have had 4 months of less debt interest before possibly needing to put debt back on the card. Am I a fool or wise? (be nice.)

I would definitly keep a years worth of bills that charge you to pay by credit card (my Personal property tax is this way). I am doing this now, at first I had the same idea as you saving the interest by putting everything towards debt, then I realized that some of my yearly bills don't make credit card payment easy so now I keep that much in cash and put the rest towards debt. Once the bill is paid (or an emergency that requires cash) happens I then reduce the amount I am paying towards my debt and put that in savings until I build it back up.
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Take all of your money market savings and pay down your CC Debt. Then make the largest payments you can til your CC debt is GONE. Ideally, you never want to revolve a balance on credit cards. These companies can reprice anytime for any reason - don't be at their mercy.

After your CC debt is gone, begin rebuilding your safety fund. Chances are you won't have need for emergency funds in the meantime, but if you do, you can always use your newly-available credit.

Clem
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A lot of this depends on your personal temperament when it comes to money. I'm working down some credit card debt, too, and I find that I feel more in control when I have some extra cash in the bank. Having that cash puts me more in control, and I'm able to make steady progress against my debt month after month.

Once in a while some unexpected expenses come up, and I'm able to handle them without interrupting that steady monthly decrease in my outstanding credit card balance. That keeps the momentum going, and I don't feel like I'm losing ground.

I think of that extra cash fund as my own set of financial shock absorbers -- they keep those inevitable bumps on the road from being too jarring.

Of course, everyone is different, and you might want to make different choices for different reasons. If the interest rate on your debt is very high, I'd be more aggressive about paying it off. All of my debt is at a fixed rate under 5%, so I'm not so worried about keeping money on hand.

Cheeze
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The answer to this question always depends on your personal comfort zone. I personally prefer to have some cash on hand so I always recommend that a person sets the level of savings that makes them comfortable and then apply anything over this amount towards their debt. As long as that debt continues to go down!

Layback
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