I occasionally talk to people who have credit card debt AND savings. They might owe $5,000 on cards and have $3,000 in savings. I’m always confused as to why people would do this. A 1995 survey found that 90% of people with credit card debt had liquid savings at the same time. Logically, it makes no sense, as you would incur large amounts of unnecessary interest.
Portfolios of the Poor, a book that describes how people survive on less than $2 a day, also reveals that this behaviour occurs amongst those living in absolute poverty. The book explains that the main reason that they borrow instead of spending their liquid savings is because of a perception that it is hard to accumulate savings and easier to repay debts, given the extra incentive of interest and someone being angry if you don’t pay it back.
Is this also why we don’t repay our credit card debt when we have liquid savings? Is it so hard to accumulate savings that you don’t want to touch it?
Still, it does not make economic sense. If you’ve got credit card debt and savings, pay off the card! If you need the card, you can just transfer off the debt.
I only have one proviso regarding this; if the card is closed, or for whatever reason, you’re unable to transfer your money at will off of the card.
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