Emily carries a $5,000 balance on her credit card with an interest rate of 19.99%. She makes only the minimum payment of 3% of the outstanding balance or $50, whichever is greater. She also has $2,000 in an emergency fund earning 2% interest. She approaches you for advice on how to improve her financial situation. What is the most financially sound advice you should provide?

Question: Emily carries a $5,000 balance on her credit card with an interest rate of 19.99%. She makes only the minimum payment of 3% of the outstanding balance or $50, whichever is greater. She also has $2,000 in an emergency fund earning 2% interest. She approaches you for advice on how to improve her financial situation. What is the most financially sound advice you should provide?

Answer options:

• Maintain the emergency fund and focus on increasing income to pay down the credit card faster. ✅ Use $2,000 from the emergency fund to immediately reduce the credit card balance.
• Consolidate the credit card debt into a personal loan at 8% and maintain the emergency fund.
• Transfer the credit card balance to a new card offering 0% for 6 months, then pay the minimum.

Correct answer: Use $2,000 from the emergency fund to immediately reduce the credit card balance.

Explanation: The interest paid on the credit card (19.99%) is significantly higher than the interest earned on the emergency fund (2%). Using a portion of the emergency fund to reduce this high-interest debt provides an 'assured return' equivalent to the credit card interest rate saved, which far outweighs the nominal interest earned on the emergency fund. This prioritizes debt reduction while leaving a partial emergency fund.