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279 MG Get Out of Credit Card Debt or Save-Which is Better?
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A different future is closer than you think, with Capelli University. Learn more at Capella.edu. [MUSIC] Hi, everyone. Thanks for downloading the Money Girl podcast. [MUSIC] I'm Laura Adams, the author of Money Girl Smart Moves to Grow Rich. A reader named Sierra asks, "I really want to get out of debt, but I also know that I should be saving money. Is it better for me to pay off a maxed-out credit card or to build up my savings?" Whether it's better to get out of debt or save money is a question that most of us have struggled with. It's like asking whether it's better to exercise or eat right. We actually need to do both, but we don't always have enough money, time, or motivation. So how do you know which option will make the most of your money when you need to choose between getting rid of credit card debt and saving? I'll discuss each choice so you know what's best for your financial situation, and I'll give you an action plan to follow. First, let's talk about the benefits of getting out of debt. If you're a regular Money Girl reader or podcast listener, you already know that debt can be dangerous. Every dollar you owe a creditor is a dollar that you can't save or invest to build wealth for yourself. It's a drain on your financial resources to have too much debt for your level of income or to pay high interest rates. But not all debts are created equal. Some come with low interest rates and built-in tax deductions that make their net cost relatively inexpensive. Mortgages and home equity loans are at rock bottom rates right now, and the interest is deductible when you itemize on your taxes. Student loans also come with tax deductions or credits up to a certain amount, regardless of whether you itemize and depending on your income. Plus, financing a home that's likely to increase in value over the long term or paying for an education that will help you earn more money over your lifetime are smart investments in your future. However, other debts, like credit cards and auto loans, don't come with tax breaks and can be very expensive, especially if you don't have excellent credit. Financing consumer goods is never wise, because they almost never appreciate in value. Instead, they depreciate the moment you take them out of the store. So getting rid of consumer debt with double-digit interest rates should always be a top financial priority. Sierra mentioned that her credit card is maxed out, which means that her balance is bumping up against her available credit limit on the account. That's a red flag that will cause her credit score to plummet. When your credit score drops, it hurts your overall financial health and gives you fewer choices. For instance, if you have good credit, you can consolidate credit card debt and save a bundle by getting a lower rate personal loan or a no interest balance transfer credit card. If you have bad credit, these money-saving remedies won't be an option. Here's a quick and dirty tip. To maintain or raise your credit score, never charge more than 20% to 30% of your available credit limit. For instance, if you have a $10,000 credit limit, don't let your balance creep above $3,000, even if you pay it off in full by the statement due date each month. I did a previous podcast on this topic called credit utilization, what it means for your credit score, which is episode number 270. You'll find it in iTunes or on the Money Girl page at quickanddirtytips.com. In the show, I answer five common questions about how to manage your credit utilization ratio, so you raise your credit score. Having good credit is also important because it affects other parts of your financial life. Like the quotes you receive for insurance, whether you can open utility accounts, rent an apartment and even get a job. So, pay special attention to whittling down credit cards and lines of credit that have high balances relative to your credit limits. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science and social studies. Ixcel has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning, get Ixcel now, and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. At Capelli University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think. With Capelli University, learn more at Capella.edu. AI might be the most important new computer technology ever. It's storming every industry and literally billions of dollars are being invested. So buckle up. The problem is that AI needs lots of speed and processing power. So how do you compete without cost spiraling out of control? It's time to upgrade to the next generation of the cloud, Oracle Cloud Infrastructure, or OCI. OCI is a single platform for your infrastructure, database, application development, and AI needs. OCI has four to eight times the bandwidth of other clouds, offers one consistent price instead of variable regional pricing. And of course, nobody does data better than Oracle. So now you can train your AI models at twice the speed and less than half the cost of other clouds. If you want to do more and spend less like Uber, 8x8, and Databricks Mosaic, take a free test drive of OCI at oracle.com/advanced. That's oracle.com/advanced, oracle.com/advanced. Now let's consider the benefits of saving over paying down debt. Let's say you have a credit card balance of $5,000 at a 26% interest rate. You racked up this expensive debt because of an unexpected emergency when you didn't have any cash. To avoid this financial pitfall, it's critical to have at least $1,000 in an FDIC insured savings account. The reality is you should have a minimum of three to six months worth of living expenses in the bank, and maybe more depending on your career and family situation. This is how you get through a tough time if you lost your job or business. But having $1,000 is a good goal to accomplish before you begin paying down credit card debt. Without some amount of emergency savings to fall back on, you could easily get into more credit card trouble and fall deeper into debt. Here's a five-step action plan to help you know the right financial moves to make when you're not sure whether to save money or get out of credit card debt. Step number one, stop making new charges to your credit card so you don't increase your balance. Step number two, always make minimum payments on your credit card so you maintain a good credit score. Step number three, max out employer matching if you have a workplace retirement account, but don't contribute more while you're concentrating on getting rid of credit card debt. Step number four, build up an emergency fund of at least $1,000 to $2,000 so you have cash to fall back on. And step five, increase credit card payments as much as possible each month by cutting your expenses ruthlessly. Once your credit card is paid down to a low utilization ratio, you could make minimum payments and then funnel extra money into savings. Or if you already have a healthy emergency fund, you could continue paying down your credit card so you wipe out the balance completely. Using your financial resources wisely is like a balancing act. You have to protect yourself by accumulating enough savings while satisfying your creditors at the same time by making timely minimum payments. Then attack your most expensive debts first so you save the most interest. Your credit card debt will be under control in no time and you'll have a cash reserve to keep you safe. For more money tips, tools, and advice, get my weekly updates when you sign up at smartmoves to growrich.com. Also, be sure to connect with me across the web on Facebook, Google+, Twitter, and Pinterest. I'm glad you're listening to change. That's all for now. Courtesy of Money Girl, your guide to a richer life. Is it time to reimagine your future? The right business skills may make a difference in your career. At Capelli University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals, like business management, strategic planning, and effective communication, and you can apply these skills right away. A different future is closer than you think, with Capelli University. Learn more at Capella.edu. Where did you get those shoots? Easy. They're from DSW. Because DSW has the exact right shoes for whatever you're into right now. You know, like the sneakers that make office hours feel like happy hour. The boots, the turn grocery isles into runways, and all the styles that show off the many sides of you. From daydreamer to multitasker and everything in between, because you do it all in really great shoes. Find a shoe for every you at your DSW store or DSW.com. [BLANK_AUDIO]