Having a nest egg of savings is a smart financial move. A healthy savings account can help shield you from unexpected expenses and any resulting financial hardship. It can also help you set and achieve financial goals, such as putting a down payment on a house or apartment. However, if you are sitting on a pile of debt, it might be a good idea to use your savings to pay it off.
Using your savings to pay off debt is not a simple decision. Whether or not this is the right choice for you will depend on the current state of your finances. Weighing the pros and cons of paying off your debt with savings can determine whether it’s the right strategy for you. Here are some benefits and drawbacks to using your savings to pay off debt. If you are struggling to pay off your debts, contact a skilled debt settlement attorney. A lawyer can provide essential guidance into the best strategies for settling or paying off your debt.
You’ll Save Money on Interest
If you have credit card debt, the APR could accrue to over 20 percent. While that’s an extreme scenario, it’s almost certain that the interest on your debt will be at a higher rate than the interest you gain on a savings account. Therefore, choosing to pay off your debts with your savings could save you a huge chunk of money over time.
You Can Improve Your Credit Score
Another consideration to take into account is your credit score. If your unpaid debts are affecting your credit score, using your savings to pay them off could be a smart strategy. Two key benefits of using your savings to improve your credit score include:
- A decrease in your credit utilization. Credit utilization is the percentage of the amount of money you owe to your available line of credit. If this is greater than 30 percent, using your savings to pay off your debt could positively impact your credit score in a relatively short amount of time.
- You’ll be more attractive to lenders. One of the factors creditors consider when determining your eligibility for a loan is your debt-to-income ratio. Paying off your debts with your savings can help you attain a favorable ratio and improve your credit score, making it easier to qualify for large purchases, such as a car or home.
You’ll Be in a Better Position to Save in the Future
Sometimes the mental hurdle of using your savings to pay off debt can be challenging to overcome. While it can feel like you’re giving up your savings, you’ll likely be in a better long-term position to save money. Choosing to direct your money toward your debt payments is a hard cycle to get out of, as you’ll likely be putting a good chunk of your money toward interest. Therefore, using your nest egg to pay off your debt quickly can set you up to save in the future.
You May Not Have Money for an Emergency
The one drawback of using your savings to pay off debt is that you may not be prepared for an emergency. Unfortunately, unexpected situations arise, and in these scenarios, it can make a big difference to have a healthy savings account.
When you’re deciding whether or not to use your savings to pay off your debts, it’s important to take a variety of factors into consideration. A debt settlement attorney can be an essential resource in determining the best way to pay off your debts.
Consult a Trusted Debt Settlement Lawyer
If you suspect your debt is getting out of control, you should consult a trusted debt settlement lawyer. At McCarthy Law, our attorneys intimately understand the stress of debt and the resulting financial hardship. Our team is dedicated to fighting for your financial freedom. To schedule a consultation with a knowledgeable and experienced debt settlement attorney, call our office at (855) 976-5777 or fill out an online contact form.