Ask an advisor: Can I take my time paying my credit card debt?

June 26, 2024 5:12 PM

A retiree in New York has $14,000 in credit card debt, but isn't sure how quickly to pay it off.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

Credit card debt is a pernicious problem in the United States. In the first quarter of 2024, Americans owed a total of $1.12 trillion on their credit cards, according to the Federal Reserve — a 13% increase from the year before. And almost 9% of those debts slid into delinquency.

Another major challenge is saving for retirement. Americans believe it would take about $1.5 million to comfortably retire, researchers at Northwestern Mutual found — but the average American only has about $88,400 saved up. And according to a study by GoBankingRates, 28% of Americans have no retirement savings at all.

So when both these problems combine in one person's finances, it's no wonder they'd reach out to experts for help. A retiree in New York is facing a double whammy: Her retirement savings are limited, and she's deep in credit card debt. She could pay off her debts right away, but that would deplete her savings. Or she could pay them off slowly, but then she'd face today's interest rates — which are at historic highs.

What should she do? For answers, she turned to financial advisors. Here's what she wrote:

Dear advisors,

Is it ever OK — or even beneficial — to carry a little bit of credit card debt?

I'm a retiree in New York City, and I don't have a lot of income. I have a small pension, which, combined with Social Security, provides enough for food and rent. In addition, I have about $100,000 in savings.

I also have about $14,000 in credit card debt. I could feasibly pay this all off in one sum, but I might rather whittle it down slowly — perhaps paying the required minimum each month, or a bit more — so I don't severely diminish my savings right away. Does that make financial sense, or am I missing something?

Sincerely,

Mired in Manhattan

And here's what advisors wrote back:

Check your rate

Kaitlin Nicholis, CFP at

Marcum Wealth

in New York City

If the interest rate on your credit card is higher than what you are earning in interest on your savings, it is best to pay off the debt in one lump sum. If you can do a balance transfer to a 0% APR (annual percentage rate) credit card, that could be an option to pay down the balance a bit more slowly. In most circumstances, it does not make sense to carry a balance on a credit card, especially with interest rates on the rise.

Dump the debt

Jarrod Sandra, CFP and founder of

Chisholm Wealth Management

in Crowley, Texas

Carrying credit card debt is almost always a lose-lose situation, in my opinion. Let's say the interest rate on the credit card is 18% and the interest you're earning at the bank is 5%. So you're hanging on to 5% and giving away 18% for a net loss of 13% on your money. Put in dollar terms of your $14,000 in question, that means you're giving $1,820 a year to the credit card company.

I know it hurts to see that $14,000 leave your bank account and go to a credit card — it always will. But what you don't yet see is the burden of that debt being lifted the day after you pay it off. I just went through this exact same exercise with a client. It hurts in the moment, but I literally have an email in my inbox this morning that says how great he feels that it's gone. So it makes sense mathematically AND you're likely to feel better about it, too. If you end up not liking it, you can always get your debt back pretty easily.

Don't forget emergency savings

Juan HernandezAriano, principal at

WealthCreate Financial

in Houston, Texas

Does it make sense to pay off your card slowly? It depends.

If by paying off your debt you're depleting your emergency savings (three to six months of nondiscretionary monthly expenses), I would favor paying it slowly enough to keep your emergency savings level but fast enough to not be affected by the rate more than necessary.

Is your credit card interest rate high? I would favor paying it as soon as possible. Are you getting some rare extra perks by carrying that balance? You may need to evaluate further around your financial goals.

Please also remember that paying the minimum balance on a card with a high interest rate may cause your debt to grow over time, and if overlooked, this debt may get out of hand quite easily.

The emotional factor

Donald LaGrange, CFP at

Murphy & Sylvest Wealth Management

in Rockwall, Texas

For me, there are two elements to your decision: the numbers and the psychology. The numbers are fairly easy: Compare your credit card interest rate to your savings interest or earnings rate. Mathematically, the "right" thing to do is pretty clear.

The psychology can be a different matter. That $100,000 in savings seems to represent something to you beyond just the money. You appear to derive some peace of mind from having it, which is harder to value. If seeing $100,000 on your statement means you have less stress and better sleep than if you "only" see $86,000, you have to weigh whether your peace of mind is more valuable than the numbers you calculated above. It can be a difficult process to work through because the emotions are rarely entirely obvious or rational.

Once you get past this decision, I'd encourage you to also take a look at the root cause of how you accumulated the $14,000 in debt. How did you exceed your fixed retirement income so much? If you don't understand that and adjust to your fixed income appropriately, you are going to have this credit card problem over and over. Please spend some time on that issue as well.

Best of luck!