Should I keep my big checking account balance or pay off my credit cards?

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The Credible Money Coach helps a reader with $14,000 in her checking account understand the value of paying off credit cards. (Credible)

Dear Credible Money Coach,

I have about $5,000 in credit card debt at 21% interest. But I have $14,000 in a checking account that earns no interest. Would it be better to just pay off the balances on the credit cards? My credit score is under 720. — Carolyn

Hi Carolyn, and thanks for your question. Congratulations on saving a significant amount of money! 

To answer your question, let’s look at how much emergency savings you need and how much you could save by paying off your credit card.

If you already have at least six to 12 months’ worth of living expenses on hand, then using your cash to pay down high-interest debt is a wise financial move. However, if you don’t, maintaining a healthy cash reserve should be your top priority.

But let’s assume that your emergency savings are in good shape. Based on your question, you already realize that keeping a large checking account balance is rarely the best option because it doesn’t allow your money to grow.  

Now, let’s consider how much your credit card debt costs you in interest.

The cost of $5K in credit card debt

Credit card companies generally set minimum payment amounts at 2% to 4% of your balance. Let’s assume your minimum payment is 4% of your $5,000 balance. Your monthly minimum payment would be about $200. 

Paying just the card minimum, it would take you about 34 months (about 3 years!) to pay off the debt. All this, of course, assumes your interest rate stays at 21% and you don’t accrue any additional debt on the card.

Consider this for your $14,000

As I mentioned, if you have an emergency fund with enough to cover six to 12 months of living expenses, writing a $5,000 check to pay off your credit cards could be a good idea. Here are some options to make your remaining $9,000 balance earn higher interest or returns:

  • Transfer it to a high-yield savings account
  • Open a certificate of deposit (CD)
  • Contribute to a retirement account, such as an IRA
  • Contribute to a 529 savings plan for college expenses for you or a child
  • Contribute to a health savings account if you have an HSA-eligible health plan

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About the author: Laura Adams is a personal finance and small business expert, award-winning author, and host of Money Girl, a top-rated weekly audio podcast and blog. She’s frequently quoted in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her speaking, spokesperson, and advocacy work. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on, Instagram, Facebook, Twitter, and LinkedIn.