Should You Save or Pay Down Credit Card Debt?

A recent report from the U.S. Department of Labor showed that employment in some sectors, such as in professional and business services and the health care industry, rose in August 2018. In other good news, it also showed that hourly wages had increased.

If you find yourself with a higher-paying job or with a little more cash, you may be wondering if you should pad your savings account or pay down your debt.

For starters, if you have credit card debt, the first thing you need to do is to put away your credit cards. Whether you ultimately save or pay down your debt, your credit cards are off-limits until you’re debt-free.

So, you’ve sworn off credit cards. What’s the best way to proceed with a modest windfall?

Let’s look at three different scenarios and see how the solutions play out for each of them. By the way, I wish I could cover every possible situation so I could customize this for you, but time doesn’t permit.

Keep in mind that the numbers I’m using may not match your exact situation. Just choose the scenario that’s closest to your circumstances, and you should be fine.

Scenario No. 1: Large Amount of Credit Card Debt With a High APR

Even if you have zero savings, I suggest focusing on high-interest debt because it will eventually — if it hasn’t already — lead to financial misery.

Credit card debt is “bad debt.” An example of “good debt” is a mortgage on your home, assuming you don’t owe more than it’s worth. It’s good debt because it’s an investment. If you’ve made a good choice, you expect it to increase in value.

Credit card debt grows, too, but it’s not the type of increase you want. With credit card debt, your balance grows due to compound interest. Basically, you’re throwing your money away, and it’s time to stop.

[Read: The Best Credit Cards Without Balance Transfer Fees.]

Let’s say you’ve got a credit card with a 22 percent annual percentage rate and you’ve got a $10,000 balance. If you still have great credit, apply for a balance transfer credit card with an introductory zero percent APR. Right now, the best offers range from 12 to 21 months with zero percent.

Calculate how much you need to pay per month to get out of debt — don’t forget to include the transfer fee amount, if applicable. Use the extra cash to throw at the debt and don’t use the balance transfer card for new purchases.

If your credit score needs rebuilding and you don’t qualify for a balance transfer card, then pay down debt the old-fashioned way. Pick a target credit card to tackle first and pay more than the minimum on that amount. Keep paying the monthly minimums on the other cards. And pay your bills on time. This is an opportunity to get out of debt and rebuild your score at the same time.

Once your debt is taken care of, then start working on building a savings account that can cover at least a month’s worth of expenses. Once you have that, target three months’ worth of expenses. Then, shoot for six months, which gives you a nice comfort zone in case of a financial emergency.

Scenario No. 2: A Little Bit of Debt and a Little Bit of Savings

This is actually the most difficult scenario because it isn’t black and white. It’s infused with a whole lot of gray.

[Read: The Best Low-Interest Credit Cards of 2018.]

But that also gives you leeway to get creative and play with the numbers. Here are some suggestions for those who identify closest with this scenario.

Let’s say you have an extra $600 per month. And yes, I picked $600 because it makes the math so easy.

Here’s how to break it down:

Debt with a high APR: Even though it’s a small balance, you still want to focus most of your extra money on that. Use two-thirds of your cash for the debt and one-third for savings. In this case, $400 goes to your monthly payment on your credit card account, and $200 goes into your savings account.

Debt with a moderate APR: Use your extra money equally. Use half of your cash for the debt and half for savings. In this case, $300 goes to your monthly payment on your credit card account, and $300 goes into your savings account.

Debt with a low APR: Focus most of your extra money on savings. Use one-third of your cash for the debt and two-thirds for savings. In this case, $200 goes to your monthly payment on your credit card account, and $400 goes into your savings account.

Scenario No. 3: Debt With a Middle-of-the-Road APR and Zero Savings

This is kind of no man’s land, but having a zero-balance savings account is a dangerous thing. The need for a new fridge could wipe you out. Or maybe even the next holiday season could.

The savings account can’t be fixed quickly unless you take a second job or get a promotion. If these aren’t options, then take the turtle approach and build your savings slowly over time.

[Read: The Best Credit Cards for Bad Credit of 2018.]

Start with your extra money and put half of it toward your debt and half toward your savings. When you get $1,000 in your savings, switch it up.

You’ve got a little cushion now, so we’re going to focus on the bad debt. Put all of your cash toward the debt. When it’s wiped out, you can start adding the money to your savings account.

Do shoot for at least six months of living expenses in your savings account. Once you have that, you can focus on investing and planning for retirement.

More from U.S. News

When Are Balance Transfer Fees Worth It?

Why It’s Crucial To Know Your Credit Card’s APR

How to Build an Emergency Fund

Should You Save or Pay Down Credit Card Debt? originally appeared on usnews.com