Should I Empty My Savings To Pay off My Credit Card?

Here’s the dilemma. On one hand, you’d love to be free of the albatross of high-interest credit card debt hanging around your neck, especially when there’s money in a savings account that could make it go away right now.

On the other hand, you’re scared of walking the tightrope of a bare-cupboard savings account when a snake pit of unexpected expenses lies in wait below.

What to do?

It’s a toughie. It can feel like one of those damned-if-you-do, damned-if-you-don’t decisions. Keep carrying the high-interest balance on your credit cards and never get out of that hole? Or give in to the temptation to use up your savings to pay off the debt today and risk waking up tomorrow morning to a $1,500 car repair bill you didn’t see coming? If it helps, you’re not alone. It’s a common quandary.

For most people, the answer should be this: No, you shouldn’t rob the Peter of your savings account to pay the Paul of your credit card debt.

That’s the right answer for many of us because there are less-risky alternatives for dealing with debt, which we’ll get to later. The trouble is, the answer isn’t that simple. (Never is, is it?) It isn’t simple because being debt-free is a marvelous state of affairs, with advantages that shouldn’t be underemphasized.

The best way to sort through the issue is to make sure you understand the benefits and consequences of draining your savings to erase your debt, so read on. Then you can apply those pros and cons to the overall health of your finances, including the size of your regular savings account and the status of your emergency savings. It’s one thing to empty your regular savings account to pay off your credit card balance but still have a crisis stash in reserve; it’s something different to be left without the funds to fight off the emergency snakes if you fall off that tightrope.

The Impact of Credit Card Debt

You should probably be sitting down when you read the next part of this sentence: Credit card debt is bad when you can’t pay it off.

Big revelation, right? So yeah, we were joking about the ‘sitting down’ part. We’re aware you’re reading this because you want to learn something you don’t already know, and you most likely already know the perils of credit cards that come with high interest rates. In good conscience, though, those dangers are worth a quick review if you’re thinking about using your savings to pay off that debt.

Your monthly credit card bill requires you to pay a relatively low minimum amount, but most of that minimum goes toward the interest your debt has incurred rather than the actual cost of what you bought with the card. The higher the interest rate on your card, the faster your debt accumulates. The faster your debt accumulates, the more your financial stress ratchets up. And guess what? Interest rates on credit cards keep going up, up, and away.

According to the Federal Reserve, the average rate in  2024 was 22.63%, up from 20.92% in 2023, and many cards carry significantly higher rates than that. If you only make minimum payments and continue to use your high-interest credit card for new purchases … well, did we mention that out-of-control credit card debt is bad?

It’s bad in ways that transcend the simple amount of what you owe. Too much debt, especially when you occasionally miss the payment deadlines, negatively impacts your credit score, which is what lenders use to determine your worthiness to be approved for a mortgage, an auto loan, another credit card and other forms of credit, as well as what interest rate you’ll be charged if you are approved.

Do you want financial stability that helps you with all of that? Do you want freedom from the anxiety that comes with too much debt? Then don’t run up a big balance on a high-interest credit card that you can’t pay down. That’s why it’s crucial to manage and address your credit card debt as promptly and efficiently as possible. And that’s why you’re tempted to use your savings to do it.

Benefits of Emptying Your Savings

Yes, there can be valuable benefits, despite our earlier point that using all your savings to pay off debt isn’t wise. (Like we said, this isn’t a simple issue.) Putting aside for a moment the jeopardy that an empty savings account presents, a life without the financial obligation of satisfying those monthly credit card bills has its ups. The advantages might not last as long as you’d like, but there’s little doubt about their appeal.

Next, we’ll outline three major positives to eliminating your credit card balances, even at the expense of your savings. As you’re weighing your choices about how to deal with your debt, keep them in mind.

Immediate Relief from High-Interest Debt

Let’s say your credit card carries an interest rate of the early-2024 average of 22.63% and your current balance is $4,000. If your monthly payment is $200, it will take you 26 months to pay it off. And that’s assuming you don’t use the card for any further charges over those two-plus years.

Wouldn’t it be nice to all of a sudden not have to worry about that? There’s a lot to be said for the peace of mind you can enjoy when you pay off your credit card debt all at once.

Potential Savings in Interest Payments Over Time

In that example we just gave you – a $4,000 balance at an interest rate of 22.63% — you’ll have paid $1,069 in interest over the 26 months it took you to eliminate the debt. Why? Because those high-interest charges compound over time. Think about what you might be able to do with that extra $1,000-plus you didn’t spend when you emptied your savings account to pay off your credit card in one fell swoop.

Here’s a point of reference. If you kept $4,000 in a high-yield savings account (say, one with a 5% rate, which is about where they top out in 2024) instead of putting it toward your debt, it would earn $456.67 in interest over 26 months. That’s nice, but it’s less than half of what you saved in interest charges when you used your $4,000 in savings to pay off the credit card.

Positive Impact on Your Credit Score

We told you a while ago that too much debt can negatively impact your credit score. Here’s how that works, and how reducing or eliminating your debt can improve it.

One of the factors that goes into calculating your credit score is called your credit utilization ratio, which is the percentage of your total available credit you’re using at any given time. When you’re carrying a lot of debt, that ratio is high. Say your card has a $5,000 limit and you currently owe $4,000 on it. That’s a credit utilization ratio of 80%. But if you pay off your credit card debt and keep the balance at or near zero every month, you’ll be using a smaller percentage of the credit you have available.

The farther below 30% your credit utilization ratio is, the higher your credit score is. And as your credit score improves, so do your future borrowing opportunities such as a mortgage, a car loan, or an additional credit card because a lender will be more likely to approve your application and offer a lower rate on the loan you seek.

Disadvantages of Emptying Your Savings

We made those benefits of emptying your savings to pay off your credit card debt sound good, didn’t we? And they are … if you can avoid the pitfalls that come along with a bottomed-out nest egg. What are those pitfalls? They take different forms, but here’s the cover-all nutshell: The chances are pretty good you’ll eventually need the funds you just committed to your debt-elimination cause.

Let’s look at some of the reasons a financial life with no savings is risky business. They should give you pause.

Loss of Financial Safety Net

Who – or what – is going to catch you when you fall into a financial hole?

The savings that might have bailed you out just went to your credit card debt, leaving you with nothing to fend off an emergency such as unexpected medical bills, an expensive car repair, a new roof after a tornado, or – perish the thought! – the sudden loss of your job.

You can’t see those things coming, but the emergency fund you emptied for the sake of your debt would have had you prepared for them.

Potential Difficulty Covering Unexpected Expenses

So, what are you going to do when you don’t have a savings cushion to soften the landing in an emergency? How will you pay for it? Ask a friend or family member to help? Sell some of your belongings? Stop paying your rent or mortgage so you can cover the emergency? Quit eating to save money? Those are troublesome steps.

And how will you deal with it if you simply can’t pay for the emergency? Let a serious medical situation go untreated? Try to keep driving an unsafe broken-down car? Live without heat when the furnace is down? Those are worse.

The consequences of going forward without the financial buffer your savings provided can be dire.

Risk of Falling Back into Debt if Not Disciplined

There is, of course, one way to pay for those unexpected expenses when you don’t have savings to cover them: You could take on new debt in the way of a home equity loan, a personal loan, or even a payday loan. (Hint: Don’t do that last one!) Or you could put those unforeseen expenses on that credit card you just paid off. In other words, you could march right back to Square One.

That, of course, can happen even without a financial emergency cropping up. If you aren’t disciplined enough to manage your spending going forward, it won’t do you much good to empty your savings and eliminate your credit card debt. That’s what ran up your balance and got you into your debt problem in the first place, right? And now you won’t have your savings to solve it. You’re stuck in a cycle of debt.

Factors to Consider Before Emptying Your Savings

Time to take stock … and we don’t mean it’s time to take your investment stocks to a broker and ask him or her to sell them so you can pay off your credit card debt. We mean it’s time to analyze your financial situation. That’s the road to the best decision about how to deal with your credit card debt.

Here are some of the factors you should consider:

• How big is your debt? And how much stress is it causing you?
• How much are you paying in interest on your debts? If your credit card doesn’t charge a high rate, it should be easier to pay it off without using your savings.
• How much do you have saved, including in your emergency fund? If the amount won’t cover the debt, what will you gain by using it this way?
• How steady is your income? If you can’t count on a weekly or monthly payday, using your savings to erase your debt becomes more hazardous.
• How sizable are your monthly expenses? Are you sure your income, even if it’s steady, can cover them without a safety net of savings?
• How easily can you come up with the money to pay for unexpected expenses if you no longer have an emergency fund?
• How confident are you that you can refrain from running your credit card balance right back up?
• How quickly would you be able to replenish your savings?
• How close are you to meeting your future financial goals such as retirement or college education or a new home? And how far would you be set back from reaching those goals if you empty your current savings to pay off your credit card?

With answers to those questions at the ready, you should be able to look into your future and evaluate the ramifications of using your savings to pay off your debt. This thorough assessment of your personal financial circumstances should establish your comfort level (or lack thereof) with the risks you’ll take by depleting your emergency fund and your other savings.

And you can use those answers to gauge the suitability of the other options you have for managing your credit card debt. You might find a less perilous alternative.

Alternatives to Consider

High-interest credit card debt isn’t pretty. Maybe we haven’t accentuated that enough, but it’s dangerous. If your goal is to get ahead of the financial game — it is, right? – then you should focus on eliminating it, or at least cutting into it.

Before you bleed your savings dry to do it, though, make sure you consider the other ways you might be able to get your debt under control. They might not provide the immediate relief your savings can offer, but they come with less exposure to a sudden money crisis.

Here are three options for managing your credit card debt:

• Creating a debt repayment plan.
• Increasing your income.
• Seeking financial advice

All three have one common advantage in that they offer solutions that protect your savings. We’ll explore those alternatives next.

Creating a Debt Repayment Plan

A debt repayment plan adds structure and strategy to how you attack your debt. There are two general ways to do it. One is called the snowball method, so named because it starts with your smallest balance and gains momentum as you work toward the larger ones, like a snowball rolling downhill.

The other is the debt avalanche method, in which you rank your debts by the size of their interest rates rather than balances. You start by paying as much as you can over the minimum on the debt that carries the highest rate, working down your list that way. The money you save on the higher-interest balances helps you pay off the lower-interest debts as you progress, in the way an avalanche hurtles down a mountainside.

Both methods require discipline and consistency, but both can work without depleting your savings.

Increasing Income

You might be able to avoid dipping into your savings if you conjure up a little extra cash here and there to put toward the monthly bills. It can be done in a variety of ways. Work overtime when it’s available or take on a second job. Ask for a raise. (You never know; it might be worth the effort.) Look for a side hustle such as driving for Uber or Lyft. See if you can monetize one of your hobbies on Etsy or Amazon Marketplace. Check into tutoring opportunities. Be a house-sitter or a pet-sitter or walker. Mow lawns. Sell your excess stuff on eBay. Hold a garage sale. Think outside the box.

The extra money you make might feel like small potatoes, but every little bit will help you eliminate your debt obligations.

Seeking Financial Advice

There might be a perfect-world scenario in which that dilemma we outlined at the start of this story isn’t a factor. A financial advisor or a credit counselor can talk you through your options and help you create a tailored plan for maintaining your financial stability while you pay off your debt. A certified counselor will discuss your unique financial situation, examine your income and expenses, review your credit report, and develop a personalized strategy for you that not only will address your problem but keep you from taking action that will make your money woes worse down the line. If the counseling is provided by a nonprofit credit counseling agency certified by the National Foundation for Credit Counseling (NFCC), the service is free.

Managing Debt and Savings

Here’s the most important takeaway from all this: Do something!

Do something to stop your credit card balance from dragging you into a never-ending cycle in which you keep borrowing more money you can’t pay back. Should that ‘something’ include emptying your savings? For most people, probably not, at least not until they’ve exhausted their other options. The risk is too great that an emergency or some other unexpected expense will send them even deeper into debt. But that’s a decision only you can make.

In most cases, the alternatives are safer and smarter, if slower. They will take time, but they will attack your credit card balance in a structured fashion that gradually chips away at your balance while they keep you afloat in the other areas of your financial life, including your savings. Maybe you can manage a repayment plan on your own, using the debt snowball method or the debt avalanche method. Or maybe your best approach is consulting a financial professional who can customize a debt management plan that reduces the interest rate on your credit cards and makes your monthly payments more affordable.

However you come at your credit card debt, be pro-active. Take action. Do something!