Generally, you should not empty your savings to pay off credit card debt because it leaves you vulnerable to emergencies, but you should prioritize paying high-interest credit card debt over building a large savings cushion, aiming to tackle debt aggressively while keeping a small, essential emergency fund (like $1,000 or a few months' expenses) for unexpected costs. The high interest on credit cards often costs more than your savings earn, so eliminating that debt provides a greater long-term financial benefit, but only if you maintain a safety net to avoid falling back into debt for new emergencies.
In most cases, using your savings to cover outstanding debt isn't a good idea. While it is important to pay down your debt and make regular payments, maintaining some sort of savings is crucial for financial security. Draining your savings is a dangerous habit that can impact your savings goals, livelihood, and credit.
Always pay off credit cards first. The interest on your savings can never match that of your credit card debt and you can always use the credit card again if you lack the savings to meet a necessary expense.
Credit utilization makes up 30%, or one-third, of a credit score on the FICO model. So while the general rule of thumb is to have three to six months' worth of savings set aside before conquering debt, remember that interest will cost you in the meantime.
Dave Ramsey's debt payoff strategy centers on the Debt Snowball method, a behavioral approach focusing on paying off debts from smallest balance to largest for motivational wins, combined with strict budgeting, cutting expenses, increasing income, and eliminating new debt, all part of his broader 7 Baby Steps plan, particularly Baby Step 2. The core idea is that behavior (80%) drives finance (20%), so small wins build momentum to tackle bigger debts, rather than focusing solely on high-interest rates.
The golden rule of credit cards is to pay your statement balance in full every single month. This practice is crucial for maintaining a good credit score and avoiding costly interest charges.
Your credit score could increase by 10 to 50 points after paying off your credit cards. Exactly how much your score will increase depends on factors such as the amounts of the balances you paid off and how you handle other credit accounts. Everyone's credit profile is different.
Strategies to help pay off credit card debt fast
Make a Transfer
A simple way to use your savings account to pay a bill is to transfer the needed amount into your checking account, then make the payment from there. You can typically make this kind of transfer by using your banking app, logging into your account online, or visiting a local branch.
A millionaire's financial success always takes a balanced approach. Millionaires understand that excessive debt can be a barrier to gaining wealth, yet they also recognize the power of compounding returns through investments.
The 2/3/4 rule is a guideline, primarily used by Bank of America, that limits how many new credit cards you can get: no more than 2 in 30 days, 3 in 12 months, and 4 in 24 months, helping to prevent over-application and manage hard inquiries on your credit report. While not universal, it's a useful benchmark for responsible card application, though other banks have different rules (like Chase's 5/24 rule).
3 months if your income is stable and you have a financial safety net. 6 months as a general rule, if you have children or large financial obligations, such as mortgages. 9 months if you're self-employed or have an irregular income stream.
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Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.
For those nearing retirement age, though, Orman offers different advice: If you're in your forever home, pay off your mortgage by the time you retire. Considering that baby boomers own 38% of America's housing stock—and more than half plan to never sell—is an important caveat.