According to 2024 data from the Federal Reserve, 46% of American credit card holders carried a balance at least once during the previous 12 months. In addition, LendingTree reports the average interest rate on current credit card accounts is 21.16%. (1)
With so much high-interest debt hanging over their heads, it makes sense for consumers to want to pay it off as fast as possible. But is it worth sacrificing savings?
Let’s say we have a friend named Dante who is debating this question. He has $10,000 stashed away in a savings account for emergencies, but currently owes $9,000 in credit card debt. He would like to be debt-free, and wonders if it would be best to pay everything off all at once or throw every penny of his disposable monthly income, around $2,000, toward repaying the debt.
Both may be viable options, but here’s what he needs to consider first.
Assuming the interest rate on Dante’s credit card debt is the same as the average mentioned above — 21.16% — and he paid $2,000 per month paying it down, he would be debt-free in just five months, paying about $450 in additional interest. A relatively small, but not insignificant amount added to what he owes.
But despite paying hundreds of dollars in added interest, by maintaining his emergency fund, Dante has shielded himself from going further into debt from any unexpected expense. In this case, he bought peace of mind.
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If Dante paid all of his credit card debt immediately using his emergency fund, he would save himself from paying any further interest, but he would also leave himself exposed.
Being left with $1,000 in savings, it could take only one major repair bill or minor medical expense to derail his finances and put him back in debt. Dante could begin putting his disposable income toward his savings, but it might take several months before he feels comfortable again.
Dante’s $10,000 savings is healthy, but it isn’t quite enough to qualify as a full-fledged emergency fund. Many experts recommend setting aside three to six months’ worth of expenses in case of a large unexpected expense or job loss.
