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Start an Emergency Fund or Pay Down Credit Card Debt

Which Should You Do First?

February 2014

This question is familiar to most consumers. It typically occurs each month when the credit card statements arrive. According to TransUnion the average credit card holder owes just over $5000. And credit cards have relatively high interest rates, currently about 13% to 15.4% APR according to So it would save money to pay this debt down as fast as possible, right? Wouldn't that be more important than saving a small "rainy day" or emergency fund? Not necessarily. Here’s why.

Why Having an Emergency or "Rainy Day" Fund is Important

Let’s say that like the average consumer you have no emergency savings, not even $500 or $1000. You owe several thousand dollars on your credit cards. Though you have been paying a little extra on credit card debt out of the little disposable income left after paying bills and essentials each pay period, you essentially live paycheck to paycheck. Then your car unexpectedly needs repairs or the dryer dies (and your family requires several laundry loads daily). What happens? You put those repairs or the necessary new appliance on a credit card and your debt load increases.

Congratulations. You have just speeded up the debt merry-go-round. You are right back where you started in your attempt to pay down credit card debt. Having an emergency fund of $1000 would typically cover such surprises without adding new debt. Then you could go on using disposable money to pay down debt and replenish your emergency fund.

Simple Steps to Stopping the Credit Card Debt Cycle

  • Create a small emergency fund to start.
  • Pay off credit card debt.
  • Step up savings to reach larger goals.

Simple Steps to Stopping the Credit Card Debt Cycle

1. Create a Small Emergency Fund to Start

I recommend a goal of $1000. (If you are young, single and rent, $500- $600 might do for starters.) To find more savings for this emergency fund (and later for paying down debt), the smart approach is to look at where your money is going now and create a workable budget. To build your emergency fund consistently, consider having a small monthly amount direct deposited from your paycheck into a BayPort Credit Union savings account.

Some timeless tips from these previous Remar’s Reports can help you save even more.

2. Pay Off Credit Card Debt

Experts differ on the most efficient or effective way to pay off credit card debt. Some recommend that you pay off the smallest balance first so that you get the psychological boost of early success. Others recommend that you work on paying down the account with the highest interest rate because that will save more money in the long run. You judge which approach might work best for you. And remember, for faster results you must pay more than the minimum payment each month.

Here are some other ideas that may help speed pay down.

  • If you have more than one credit card, consider a consolidation loan at BayPort Credit Union. Installment loans usually have lower interest rates than credit cards. You’ll have just one payment to make, rather than several. Plus installment loan debt typically does not ding your credit score as much as credit card debt.
  • Consider a balance transfer. Moving all or some of the balance on a card with a higher interest rate to one with a lower interest can save money. Your BayPort Credit Union credit card probably has a very competitive low rate.
  • Use the tips above to save more money to use to pay credit card debt. Some of the most effective I’ve found are going to a cash only policy: I use cash, debit card or check to pay all daily expenses and leave the credit cards at home. I also put a weekly spending limit on that cash.

3. Step Up Saving To Reach Larger Goals

When you have paid off all your credit card debt, it’s time to move to larger goals such as building a larger emergency fund, paying off student loan debt, building your retirement savings, or saving a down payment for a mortgage.

  • Most experts recommend that for greatest security, individuals keep an accessible emergency fund of 3 to 9 months living expenses. Such a fund can help you and your family manage expenses and transitions in the case of a major expense or life change such as a major illness or change in employment.
  • If you have significant debt from college loans, you may be able to take steps to manage this debt more easily or to consolidate it. The information in the Remar’s Report Higher Education Loans—Tips to Minimize Debt may be helpful.
  • The earlier you start saving for retirement, the more time your money has to grow. If your employer matches your contributions, most experts recommend that you make at least a minimum contribution even while you build an emergency fund and pay off credit card debt.

The Bottom Line

In this report I’ve been talking about protecting yourself and your family against unexpected expenses and breaking the credit card debt cycle. But taking the bigger picture, I’m talking about managing your money and your buying power wisely. The more you spend what’s in your pocket today for what you want or a moment of pleasure (whether you need it or not), typically the less money and the more debt you’ll have. Conversely, the more you plan and use your money within that plan, the more money you’ll have to finance the good life and your dreams.

For More Information

BayPort Credit Union Savings

BayPort Credit Union Personal Loans

BayPort Credit Union Credit Cards

Remar’s Report: Strategies for Saving More

Remar’s Report: Tips to Enhance Your Plan to Save More

Remar’s Report: Higher Education Loans—Tips to Minimize Debt

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