Martin Lewis has given a caller key advice on £1,000 savings – and what to do with credit card debt. The ITV personal finance guru was speaking on his BBCpodcast and handling the issue of balancing your finances and what to do in the event of an emergency.
Mr Lewis said that a person with £1,000 in savings and credit card debt is making a big mistake by not using it to reduce the amount on the card. The question had come from listener ‘Maxine’ who said: “Hi Martin I’ve heard you say before to pay off credit card debt first before saving. I also know the sensible thing is to pay your credit card off every month. But how do you pay off credit card debt which has accumulated while making sure you have liquidity for emergencies life for example a boiler or something. What’s the best way to pay down credit card debt and maximise savings for emergencies at the same time.”
Martin replied: “Maxine you are quite right I do always say you should absolutely prioritise paying off expensive credit cards before savings. You asked me about liquidity but I’m actually more concerned about having funds to pay. And I make that difference quite deliberately.”
The Money Saving Expert founder gave a scenario which he said was necessary to explain his point: “Imagine you have £2,000 of debt on an expensive credit card that’s accrued and you want £1,000 to put in savings. In the way you’re explaining it you can’t use that savings to pay off the debt because you want to keep that savings aside for the emergency fund.
“Now, I’m in favour of emergency funds, but not while you have credit card debt. Here’s why. Take that £1,000 and pay it off the credit card. Your situation before was that you had £2,000 debt and £1,000 of savings – a net £1,000. Your situation now is you have £1,000 debt on the credit card and you have no savings. So what happens in the event of an emergency?”
The personal finance guru said that failing to clear the debt would leave the person in a ‘worse position’ and that in an emergency there was a simple solution. Mr Lewis explained: “Well, in an emergency, you’ve got £1,000 of room on your credit card and you go back and put it on the credit card again.
“That would leave you in no worse a position that you were in before – because you still had £2,000 credit card debt before – but in the mean time if there isn’t an emergency, you’ve got £1,000 less debt on your credit card that you’re being charged 25 per cent interest on which means more of your money that you are earning isn’t having to pay the debt interest and you’re better off.
“So by paying off the credit card you’re still leaving yourself room to use those credit cards if you have to in an emergency – but in the meantime you’re saving on them.“
To listen to the full podcast click here.