Should you grow your emergency savings or pay off your debt first?

When an emergency strikes, you may need to empty your emergency savings fund and use credit cards to help pay for unexpected expenses. After you’ve made sure everyone is safe, and all your emergency expenses are taken care of, you now find yourself with a depleted savings account and credit card debt.

So, what’s next? How do you get your finances back on track when you find yourself in a less-than-ideal situation? Is it smarter to replenish your emergency fund first and then pay off the debt? Or should you tackle the high-interest credit card balances prior to anything else?

Before you jump into action, take a minute to feel good about having an emergency savings fund to use! While it can feel scary to empty your account in a dire situation, that is exactly what the money was for. Now, let’s lay out a plan for what you’ll want to do next.

What you’ll learn:

• Rebuilding your emergency savings account
• Transferring your credit card balances to a low-interest credit card
• Replenishing your emergency savings and tackling credit card debt

Rebuilding your emergency savings account

The most important financial tool to have is an emergency savings fund. Having even a small nest egg saved can spare you from a detrimental impact on your credit score due to collections or help you avoid the burden of interest charges from credit card debt. Just one quick trip to the hospital could severely damage your credit score if your credit limit isn’t high. Imagine having to run to the ER with your $3,000 limit credit card. The average cost for a non-emergency visit to the ER is between $2,400 and $2,600, leaving you with 66% credit utilization once you’ve paid the bill.

America’s most trusted personal finance expert, Suze Orman, suggests having 8-12 months of emergency savings before aggressively paying off debt. Rebuilding a year’s worth of expenses can feel overwhelming at first, but it is possible.

Transferring your credit card balances to a low-interest credit card

High-interest credit card balances can damage your credit score. It’s harder to pay down quickly, and your credit utilization takes longer to decrease because accruing interest keeps increasing your balance.

Your credit utilization accounts for 30% of your credit score, so if possible, you should try and transfer your balance to a lower-interest or no-interest credit card with a higher credit limit. Balance transfer credit cards often have a 0% APR (annual percentage rate) promo period for a year, so you can focus on replenishing savings without worrying about racking up more interest each billing cycle.

Note: Resist the urge to drain your retirement plan to pay for high-interest credit cards. Remember, it’s not as much about the amount of money you deposit into your retirement savings every month as it is about when you start to save for retirement. Draining your retirement accounts for the quick payoff of diminishing credit card debt will erase all the compounding interest you’ve worked toward.

Replenishing your emergency savings and tackling credit card debt

Ideally, as you’ve been setting aside money each month in your emergency savings account, you’ve paid the minimum payment on your credit cards. Suze Orman recommends only paying the minimum amount on each card while working your way back from a big expense. But remember, making those payments is important because payment history is the largest factor on your credit score, at 35%.

Orman suggests that even if you have other forms of debt—student loans, mortgages, etc.— focus on credit card debt first. While all debt may feel negative, remember that some things are considered “good debt” by lenders, like student loans and mortgages. These types of debt are viewed as investments in your future and typically have lower interest rates.

There are multiple methods for paying off credit card balances. Orman recommends an approach that can easily fit into your budget once you can back off on your aggressive emergency savings goals.

To start tackling your debt, add the minimum payments of all your credit cards together. Then, find 20% of that total amount and pay that extra 20% to your highest-interest credit card. For example, if you owe $200 in minimum payments total, you’d make the minimum payment to your highest-interest credit card and pay an extra $40.

Once you’ve paid off the credit card with the highest interest rate, you can put the extra 20% to your next highest-interest card, and so on, until you’ve successfully paid off all balances to zero.

Saving money after an emergency and getting credit card debt under control is a process. Unfortunately, it can't be done overnight. Trust in the process and know these things can happen to everyone. Having credit cards and an emergency fund to use in the first place is something you should feel proud of.