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For many people, getting out of debt as quickly as possible is a major priority — especially if you’ve carried the debt for several years and have been getting crushed by high interest charges. So if you’re this close to getting rid of your balance once and for all, you might be wondering if it’s a good idea to use savings from an emergency fund to pay off your debt for good.
Why paying off debt can feel so urgent
Many people aim to pay off debt as soon as possible because paying down your balance means saving on interest charges. “Good” debt is generally considered any debt that has an interest rate below 7%, while “bad” debt is thought to carry an interest rate above 7%. The truth is, however, paying any interest on top of your balance can sometimes make you feel like you’re taking one step forward and two steps back. This is why many Americans believe they will never pay off their student loan balances, or why high amounts of credit card debt can often feel crippling. The faster you pay down your balance, the less money you’ll have to spend on interest charges.
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Another draw when it comes to quickly paying off debt is being able to redirect your money toward other goals. Northwestern Mutual’s 2020 Planning & Progress Study found that 58% of respondents who carry debt feel that their balance has been preventing them from hitting major financial milestones. Of those respondents, 36% delayed making large purchases, 29% said they delayed saving for retirement, 18% delayed purchasing a home, 8% delayed having children and 7% delayed marriage. So being able to finally achieve certain financial goals can be an important driver when it comes to aggressively paying off your debt. If you spend $500 per month for credit card or loan payments, you can redirect that $500 toward retirement savings, or a wedding, or a home purchase once you’re debt-free.
Should you use your emergency fund to pay off debt?
The short answer is: it depends on how much debt you carry and how much money you have in your emergency fund. Keep in mind that your emergency fund exists to cover unexpected expenses that would otherwise set you back financially and put you deeper into debt. So if you had to use a significant chunk of your emergency fund to pay off debt, you may greatly reduce your ability to cover a big unexpected expense. This is why you need to consider how much debt you have left and how big your emergency fund is. For example, if you have $10,000 in your emergency fund and a $5,000 credit card balance remaining, paying off the debt would wipe out half of your emergency fund — and this could put you in a more vulnerable financial position if you don’t have any other savings. But if you have a $10,000 emergency fund and a $500 credit card balance remaining, you may be more likely to use some of your savings and still feel confident in your ability to handle a large unexpected expense. “If paying down these types of [debts] leaves you vulnerable to a financial crisis that could potentially result in harming your credit, filing for personal bankruptcy, or being temporarily or permanently impoverished, then the financial reward from the debt reduction interest savings may not be worth the risk,” explains J.R. Robinson, a Personal Finance Expert at Credello. And if you do decide that it would be feasible for you to use some cash from your emergency savings to pay off your debt, don’t forget to take the steps to rebuild your emergency fund.
Methods for paying off debt faster
There are many strategies you can use to become debt-free a little quicker and to make the process feel a bit more manageable. If you have multiple debts with varying interest rates, you can try the debt snowball method to help you throw extra payments at the debt with the lowest balance first (while making just the minimum payments on your other debts). This lets you pay down one balance much quicker, which will also keep you motivated to keep working away at your other balances. On the flip side, the debt avalanche method targets the debt with the highest interest rate first (while making the minimum payments on your other debts). This helps you save the most on interest charges. You might also consider using a personal loan to consolidate multiple debts — especially if making payments toward several balances feels a bit overwhelming. With debt consolidation, you’ll apply for a specific amount that’s enough to cover the total of all your debts and the lender will send a specified amount to each of your creditors to pay off those debts. Then, you’ll only be responsible for paying back the personal loan in the form of fixed, equal monthly payments plus interest. Most personal loan lenders — like LightStream and SoFi — allow you to apply for a debt consolidation loan.
LightStream Personal Loans Learn More Annual Percentage Rate (APR) 2.49% to 19.99%* when you sign up for autopay
Loan purpose Debt consolidation, home improvement, auto financing, medical expenses, wedding and others
Loan amounts $5,000 to $100,000
Terms 24 to 144 months*
Credit needed Good
Origination fee None
Early payoff penalty None
Late fee None Terms apply.
SoFi Personal Loans Learn More Annual Percentage Rate (APR) 5.74% to 21.28% when you sign up for autopay
Loan purpose Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses
Loan amounts $5,000 to $100,000
Terms 24 to 84 months
Credit needed Good to excellent
Origination fee None
Early payoff penalty None
Late fee None Terms apply.
Another effective option can sometimes be using a 0% APR balance transfer card if high interest rates are making it feel difficult to pay off your credit card debt. So let’s say you apply for a credit card like the Citi Simplicity® Card or the U.S. Bank Visa® Platinum Card: you’ll be able to transfer the balance of an existing credit card to a new card and pay off as much as you can with an introductory 0% interest offer.
Citi Simplicity® Card Learn More On Citi’s secure site Rewards None
Welcome bonus None
Annual fee $0
Intro APR 0% for 21 months on balance transfers; 0% for 12 months on purchases
Regular APR 14.99% – 24.99% variable
Balance transfer fee 5% of each balance transfer; $5 minimum
Foreign transaction fee 3%
Credit needed Excellent/Good Terms apply.
U.S. Bank Visa® Platinum Card Learn More On U.S. Bank’s secure site Rewards None
Welcome bonus None
Annual fee $0*
Intro APR 0% for the first 20 billing cycles on balance transfers and purchases*
Regular APR 14.74% – 24.74% (variable)*
Balance transfer fee Either 3% of the amount of each transfer or $5 minimum, whichever is greater
Foreign transaction fee 2% to 3%
Credit needed Excellent/Good *See rates and fees. Terms apply.
Lastly, creating a budget may help you pay down your debt faster all while being beneficial to your overall financial health. “By tracking your money and changing spending habits, you can free up cash to pay off debt faster,” Robinson says. “Look for ways to spend less money and also make more money. Where can you cut corners? Can you cook more and order out less? What about a side gig or selling some items you own?” Catch up on Select’s in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.