Dear Moneyist,
I am 27 years old and a real estate agent in New York City. Lately, I have found myself really thinking about what to do with a sum of money that’s coming in to me from a couple of real estate closings next month.
For the past 2 years I have ramped up $15,000 in credit-card debt with an average of 20% APR. I will be collecting about $25,000 within the next 30 days. I’m debating whether to pay off my entire credit-card debt or invest it in blue chip stocks for the next 6 to 12 months, hoping to ramp up some profit.
What’s my best decision? Eliminate that debt once and for all or take on the chance to potentially pay off my debt from my profit? I have trading experience.
Thank you. I appreciate your time.
Ronald
Dear Ronald,
The answer to your question is relatively simple: Pay off your credit-card debt.
The answer to the bigger question is less simple. You spent $15,000 on credit cards, presumably confident in the belief that you could pay it off. Not paying it off every month in full is costly, yet you still feel sure enough to take this $25,000 and invest it elsewhere. I fear the same eagerness that led you to rack up $15,000 in credit-card debt at 20% APR will lead you to make another decision that puts self-belief over self-discipline.
I posted it on the Facebook Group for this column and it went gangbusters. It surprised me because the answer was a slam-dunk: Pay off the credit cards. But members of the group also made some salient comments. Many said, “Pay off the debt now as you won’t get a 20% market return on blue chips.” Another added, “Your expectations are just too unrealistic.” The S&P 500 SPX, -0.66% and Dow Jones Industrial Index DJIA, -0.99% has been fluctuating wildly in recent weeks.
I don’t know how you got into debt. You say it ramped up. I assume, if it was due to an unforeseen medical emergency or bill shock, you would have mentioned it. The good news is: After paying off your credit card, you will still have $10,000 left over. You could save some of this in case you do have another unwelcome surprise or avail of some of the tax advantages by investing in an IRA. MarketWatch’s “Tax Guy” Bill Bischoff has some timely advice on that.
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As Greg McBride, chief financial analyst at personal-finance site Bankrate.com, once told me: “Making minimum payments on your credit card is a treadmill to nowhere.” Sticking with that fitness illusion: Making zero payments on your credit card is akin to sitting in your gym’s dressing room, eating chips and drinking soda. It’s just a really bad idea. There’s also a broader impact. Around 30% of the FICO credit score is based on how much people owe on their accounts.
Bad decisions, whether they are financial or otherwise, don’t usually happen in isolation. So I want you to be aware that this is likely part of a pattern. If you look back at your life, you may see other signs — some minor, others less so — that point to over-zealous, well-intentioned behavior getting you into trouble. I say this not to chastise you. We all make mistakes. But they are often the same mistakes made again and again, and again.
Save $15,000 now and, perhaps, $150,000 by avoiding this kind of folly.
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