Most people like to pay their debt as quickly as possible as the high interest. You should just pay off what you can, as quickly as you can, right?
Not so fast.
It’s actually possible to pay off your credit cards too fast. What?!? Here are three reasons to take a step back and evaluate whether or not you should pay off your credit cards immediately.
1. You Don’t Want to Completely Deplete Your Emergency Fund
If you have a chunk of change in your emergency fund, it might be tempting to just take the sum and pay off your debt.
The problem with this, though, is that you open yourself to financial vulnerability if an emergency crops up. You might have to turn to your newly-paid-off credit card. When that happens, you wind up back in debt, and you’ve got no emergency fund on top of it.
There’s a reason that gurus like Dave Ramsey suggest you keep at least $1,000 in an emergency fund before you start paying off debt. That way, if something happens, you can cover it without go further into debt.
Don’t deplete your emergency fund in an effort to get rid of debt right now.
David’s Note: This comes down to psychology doesn’t it? I’m a numbers guy, and I would still pay my last $1,000 earmarked for emergencies into my credit card debt if given the choice. That’s because emergencies may or may not happen and if it does, then I can always just use the credit card to pay for those expenses. The difference though is that I gain the interest I’m not paying in the mean time.
However, the approach works for me because I would never abuse my credit card purchasing power. Many people get into debt because they don’t have the willpower to keep themselves from spending. For these people, keeping $1,000 in an emergency fund, and paying the extra interest can more than pay for itself because they get to cut up their credit cards and not let that extra purchasing power tempt them into more debt.
Different approaches work for different people. The key is to be honest with yourself and apply the one that works for you.
2. Watch Out for Cutting into Your Regular Expenses
You feel rich on payday. You feel like you can put $500 toward debt, and it makes sense. Pay it off faster and win right?
Unfortunately, you might not actually have $500 to put toward that debt. What about your regular expenses, like groceries and insurance premiums? Have you looked ahead to the bills you will need to pay in two or three weeks?
Your debt payment needs to be based on your budget and grounded in the reality of your regular monthly expenses. If you aren’t looking at your whole monthly expenses, and just throwing money at your credit cards without a plan, there’s a good chance that you will need to turn to credit cards in order to get through the rest of the month.
That means you take a step back for every step forward. Instead of getting excited and putting a large amount toward debt when you get paid, make it a point to map out your budget. Look at your income and expenses. Then make a debt payment plan that calls for an extra debt payment based on the money you have available.
3. Don’t Put Your Future at Risk
Finally, it can be tempting to take a loan out from your retirement account in order to pay off your debt more quickly. However, that can be a bad idea as well. Even though you are “paying yourself interest” on the loan, the reality is that you can’t replace the time the money is out of the market.
Another potentially dire consequence is that you could suddenly end up needing to pay the whole loan back at once. For instance, the entire retirement account loan comes due within a few months if you lose your job. The amount becomes an early withdrawal if you can’t pay it back — subjecting it to penalty and taxes. That could put you in an even worse position.
Just because it seems like you should pay off your debt quickly doesn’t mean that you should be so extreme that you put your finances at greater risk.
What do you think? Is getting rid of credit card debt always first priority for you? Has this mentality ever burned you?