Emergency funds vs. credit card debtDate posted: 12/1/15 10:15:00 AM
Most Americans realize the importance of keeping an emergency fund for unforeseen events such as automotive repairs or a health issues, but understanding the significance and saving for it are two entirely different obstacles.
A recent report from Bankrate that polled more than 1,000 American adults revealed 24 percent of Americans have more credit card debt than they have in their emergency savings, and 13 percent said they don't have any emergency savings fund or debt tied to credit cards. In all, more than two-thirds of respondents had credit card debt that equaled or surpassed their emergency savings.
And it's not like the average credit card debt isn't substantial. NerdWallet revealed the average credit card debt for a U.S. household was $15,611 in December 2014. Meanwhile, the average student loan debt was more than $32,000, and the average mortgage debt was $155,192.
Greg McBride, chief financial analyst at Bankrate, can't stress the poor situation because of limited savings and substantial debt.
"These numbers mean that three out of every eight Americans are teetering on the edge of financial disaster," McBride said in a release. "People between the ages of 30 and 49 are in the worst shape, probably because of the expenses associated with raising children and paying a mortgage."
Surprisingly, McBride added senior citizens and millennials were more likely to have an emergency savings account that exceeded their credit card debt.
"However, oftentimes, unexpected events happen, and without an emergency fund, consumers with high-interest rate debts usually resort back to loans and most frequently, the credit card, since it is the easiest form of accessing money," McBride said.
How to manage credit card debt
While there isn't one definitive way to erase credit card debt in a hurry, Credit.com gave a few tips to expedite the process.
The source said Americans should either consider knocking down the credit card with the lowest balance or taking on the card with the highest interest rate.
"Based purely on the numbers, one might recommend to focus on the high-interest rate credit debt since it costs more money out of pocket…," McBride said.
When tackling the card with the highest interest rate, Credit.com said consumers should consider doubling or tripling their monthly payments. The faster a person can tackle his or her highest interest card, the sooner he or she will reach a debt-free lifestyle. Once the highest-interest card reaches a balance of zero, it's time to move on to the next highest card.
But sometimes it can be easier for someone to stick with a credit goal if he or she attacks the card with the lowest balance first. These Americans should pay the minimums on their other credit cards while putting the most money possible toward paying the credit card with the smallest balance. Some utilize this method because it's easier to track the progress of going after the smallest balance cards one after another.
A better financial stance than last year?
Bankrate's survey isn't all doom and gloom. More Americans were able to put aside cash for an emergency fund compared to recent times. The report states 58 percent of Americans had more savings than credit card debt in the first quarter of 2015, which is a 7 percent increase from the previous year.
Additionally, more people felt better about their financial standing and job security. In a new survey low, only 16 percent of respondents said their financial well-being was in worse shape than the previous year. Twenty-four percent of respondents added they felt better about their job security.
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