Owe Money on Your Credit Cards? Make This One Move Before Paying Them Off

If you owe money on your credit cards, you're not alone by any means. U.S. credit card balances reached $995 billion during the third quarter of 2023, according to TransUnion. That's a 15% uptick from a year before.

You may be eager to get your credit cards paid off as quickly as possible. And that's a great goal to work toward. But before you start chipping away at your credit card balances, there's one important thing you need to do first.

Beef up your emergency fund

Before you start using all of your extra money to pay off your credit card debt, look at your savings account balance. If it's not much to write home about, then before you continue on the path of chipping away at credit card debt, do your best to build up a solid emergency fund.

You may want to wait until you have a three-month emergency fund before you start putting money toward your credit card balances. And by "three-month emergency fund," we're talking about having enough savings to cover three months of essential bills -- things like rent, car payments, food, utilities, and healthcare expenses.

Now, you may be thinking, "But my credit card is charging me 20% interest on my balance, and I'm racking up those charges by the day." And that's a fair point.

But one thing you should realize is that if you chip away at your credit card debt without making sure you have cash reserves in the bank, what might happen is that you whittle down that debt…only to add to it again the next time an unexpected bill arises. While it might seem counterintuitive to hold off on paying down credit cards when you can, if you don't have money in the bank, you risk landing back in the hole.

That's why building an emergency fund should be your first priority. If you don't, you might pay off your credit cards only to have to fall back on them again and again. That's not what you want.

A more efficient way to pay off your credit card debt

Building your emergency fund should come before paying off your credit cards. But once you're ready to do the latter, one option you may want to look into is a balance transfer, where you move your balances onto a single card with a lower APR (or, ideally, a limited-time 0% introductory APR). Lowering the interest rate on your debt could make it easier to pay down.

You can also look at consolidating your credit card with a personal loan. If you have strong credit, you might qualify for a much lower interest rate than what your cards are currently charging you. And this way, you get the benefit of fixed monthly payments.

You may be motivated to pay off your credit cards so you don't have to lose even more money to interest. But make a point to build up savings first. Otherwise, you might set yourself up to keep falling into the same debt trap time and time again. And you deserve better.