Wednesday, March 4, 2009

Horde cash or pay off a credit card?

Back today, as promised. This time, I've got a question for you:

I've written several times about the advantages of keeping spare cash in an online savings account, such as those offered by ING Direct or HSBC Direct. Everyone should have some spare "just in case" cash around for emergencies, and the online banks give you the advantage of paying far more in interest on the money than a traditional bank savings account.

That is, they used to. These days, I'm starting to question the decision I made to keep a decent amount of cash in my ING Direct savings because the interest rate they're paying me has fallen so far. When I opened the account in March 2007, I was earning a 4.1 percent APY (interest rate) on my money. Today I checked my balance and found that my rate was lowered to 1.638 percent yesterday. That's just the latest of several rate cuts that essentially amount to ING taking cash out of my pocket. ING cut the interest it pays me on my money four times since Dec. 30.

Which brings me to my question: Should I take the cash out of my ING account and use it to knock down my last remaining credit card bill? The cash I have with ING isn't enough to fully eliminate the bill, but it would cut it substantially and cut down the number of monthly payments I'm making and the amount of interest I'm paying to the card issuer. Beyond that, I'd get a much greater rate of return by paying on the than I would at ING, since the interest rate on the card is almost nine percentage points higher.

So, what would you do?

4 comments:

laughing808 said...

interesting question....as I'm preparing for hard times in the months to come I actually have a little money in both an ING and HSBC account. And as you said it won't completely pay off my debt, but it would make a difference.

I think I'll take the money and double up in the future when the market is much better and can offer me a better interest rate on my money.

Mia6998 said...

First, I want you to get out of my head. I was JUST looking at my MMDA account, like this rate isn't even better than a savings account at a bank.

I'm also torn because Suze Orman changed her credit card strategy. Before she preached to pay more than the minimum. Now she says just pay the minimum and focus on increasing your emergency savings.

I get why emergency savings are important BUT I wouldn't need as much in emergency savings if I had less debt.

SO...I say all that to say...take the money out to pay down the credit card OR put the money in to a CD or I-bond because rates right now are better on both of them than on any online savings program like HSBC, ING, Capital One, Emigrant, etc.

BTW, I like this role reversal. ME giving YOU advice ;)

Butterrfly said...

There is no freedom like freedom from debt! Personally I would pay off the debt as quickly as possible, for the very reason that the interest rate differential between your ING savings account and credit card exceeds 8% to your disadvantage. (Note: If the credit card APR was less than 2% then my advice would be opposite). Moreover the sooner you pay off the credit card balance, the sooner you will be able to enjoy an increase on your disposable income --putting to better use those dollars previously earmarked for credit card payments. ;-)

Vdizzle said...

I haven't had my ING account that long, but I've noticed the drop in the interest rate too.

I mapped out a plan to pay off my debt and moved way ahead of schedule when I put half of my tax return towards all the bills.

But I'm not so confident in my discipline with money yet and like the fact that I don't have immediate access to it.