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Should you pay down credit card debt or build up savings?

By Lucy Lazarony · Bankrate.com
Thursday, December 16, 2010
Posted: 10 am ET

You have limited money left over each month. Should you put that money toward your credit card debt or should you focus on building up your savings?

What's the best financial move for you? Consider one of these strategies.

Boost your bottom line. From a purely dollar and cents standpoint, paying down credit card debt makes the most sense. When you consider how much the interest rate on your credit card debt is costing you and how little you'll earn by tucking money into a savings account, paying down credit card debt seems like the way to go.

"With credit card rates as they are, and with such low savings interest rates, I always recommend to clients that they pay down, pay off their credit card debt before building up their savings," says Tom Adams of Adams Financial Planning in Downers Grove, Ill.

Break the debt cycle. If your main goal is to free yourself from a continuing cycle of credit card debt, you may want to focus on building up some savings. If you have no savings, it may be difficult to make any headway that sticks with your credit card debt because every time an emergency or unexpected expense pops up, you'll need to reach for a credit card.

Building an emergency fund of $1,000 or $2,000 is a good way to start.

"Once you have a modest cash reserve in place, then send everything you possibly can to paying down credit card debt," says Abigail Pons, a certified financial planner at Capella Financial Services in Pittsboro, N.C.

Do a little bit of both. Want to boost your bottom line and free yourself from the cycle of debt? Each month, pay some extra cash toward your credit card debt and tuck a little money aside for savings.

This may be a good strategy for people with little or no savings, says Katherine Holden of Holden Financial Planning in Wayne, Pa.

"I suggest paying more than the minimum on the debt, then allotting some money for saving even if initially only $50 per month," Holden says. "If the money is automatically deducted each month to a saving account, it will guarantee growth of the account."

Whether your goal is to pay down credit card debt, build up savings or a little bit of both, you'll want take a close look at your budget.

A few small adjustments to your budget may be all you need to free up some additional cash.

This budgeting toolkit and these savings tips will help you get started.

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2 Comments
Gary Meadows
December 16, 2010 at 11:24 am

A company called me on the phone and they said they would lower my interest on my credit cards by 50 percent and that would help me pay them off over twice as fast and they would charge me $995.00 and put it on my credit card, but I would save 3 times that. Is that a good deal?
Gary