Pay Off Debt or Save for Rainy Day - Credit, Debt, Savings ...

Reasons to Pay Off Debt First:

1.? You want to lower your monthly payments quickly.
Paying off high-interest debts will reduce your overall monthly payments, which frees up more cash for savings and other expenditures. So, if your primary objective is to slash your monthly bills and more quickly free up cash, you'll want to pay off debt as soon as possible.

2.? You need to boost your credit score.
If you're planning to buy or refinance a home in the near future or seek some form of credit, you'll need to have a good credit score. Accumulating savings won't do much for convincing lenders that you should get a low-interest loan (unless you're using the cash to reduce your loan amount).

In general, lenders will scrutinize your credit score because it's indicative of your payment track record and it also reflects how well you've handled credit card debt. That's because 30 percent of your FICO credit score is based on the amount of credit card debt you have outstanding. Shedding some of that debt to give your credit score a boost could make you eligible for much better interest rate on a long-term loan, potentially saving you thousands of dollars.

3.? Avoid interest rate hikes.
If you're carrying a credit card balance that was initially offered with a promotional offer or zero-interest rate, you might want to pay it sooner rather than later, to avoid an interest rate hike. Going from a teaser rate of 0 percent to a 15 percent rate, which is the current average rate for credit cards, means you'll be subjected to finance charges on top of the charges you made for purchases. So paying off that debt quickly prevents you from having to pay extra, or potentially excessive, amounts of interest.

Next: 3 good reasons to save first. >>

Source: http://www.aarp.org/money/credit-loans-debt/info-01-2012/savings-versus-dept-dilemma.html

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