Dear Liz: I have $16,000 in the bank as an emergency fund. I’m trying to get serious about paying off my debt, including a $7,500 credit card balance. I was thinking of getting a fixed-rate loan from my credit union to pay off the credit card balance in 36 months.
I have another loan (for my son’s private school tuition) with an original balance of $4,950. I’m supposed to make 12 payments interest-free, which will leave a balance of $3,020, which then reverts to 12.5% interest for the next 14 payments until it is paid off.
What should I do?
Answer: Getting a fixed-rate loan from a credit union to pay off credit card debt is often a good idea — if you don’t already have cash sitting around to pay off the debt, which you do.
Unless you’re in real danger of losing your job, using your savings to pay off the cards is a virtual no-brainer. Clinging to cash that’s earning less than 2% doesn’t make sense when your debt is probably costing you a double-digit interest rate.
When the card debt is paid off, you can focus on rebuilding your emergency fund — until the interest-free period on the school loan is up. At that point you should pay off the rest of the debt.
It should go without saying, but you also need to fix whatever issue caused you to rack up the debt in the first place.
If you can’t afford to pay in full when the bill comes, you shouldn’t buy it. That’s as true for private school tuition as it is for credit card purchases.
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