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Sell a CD to Pay off Debt?

Question:

I have 9,000 in credit card debt. I also have a CD worth 14,000. I am thinking of cashing in my CD, to pay off my debt. Is this a good idea?

-Christy

Answer:

Hi Christy,

Assuming the interest rate on your credit card is reasonable and you aren’t having difficulty making the payment each month, I would continue to make those payments. There is a certain discipline involved in paying down debt. Using savings to pay off debt often gives a false sense of financial security leading to increased spending.

Remember, it will be years before you’ll be able to replace that savings.

In today’s economy, an emergency fund is absolutely essential, and one that equals three to six months’ of living expenses is ideal. Does the $14,000 put you in that position? Is this your entire savings? Will you be financially vulnerable if it’s no longer there? Will you have to pay a penalty if you cash in your CD?

If you answered, “Yes,” to those four questions, then you should probably hold onto your CD and increase your savings while working to reduce your spending in order to pay off your credit card sooner.

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