In Suze Orman‘s most recent book, “2009 Action Plan,” she urges people with credit card debt to pay off their balances as quickly as possible using the high interest first method. “The fact that you pay just the minimum is a huge warning signal to your credit card company,” she writes, “that you may already be on shaky ground.” Now she’s changed her mind and says you should just pay the monthly minimum and put the rest of your money toward building an emergency cash stash. Based on the way credit card companies have been behaving, we think she has a point.
Originally, Orman’s goal was maintaining a high FICO score by having paid-off credit cards on your account. This served a second purpose, too: your active, paid-off cards provided a source of quick cash in case of a huge life emergency.
Now that credit card companies are slashing credit limits and unexpectedly closing accounts on customers—even ones with stellar payment histories and low debt-to-credit-limit ratios—Orman says all bets are off.
So here is the problem. If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down-what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit, to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed.
So what’s the right size for an emergency account? Orman says 8 months of living expenses, and even if it takes you a couple of years to build that up, this is no time to trust that your credit cards will be there for you in the months to come. Once you’ve hit that magic number, go back to clearing off those credit cards.
What do you think is the right amount of an emergency savings to build up, especially if you remove the safety net of open lines of credit from the picture?
“A Change in Credit Card Strategy” [SuzeOrman.com] (Thanks to Greg!)
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I think Suze is generally right that Americans, in general, ought to have a bigger emergency fund (or if they don’t have a fund they ought to start one). I’m more of Dave Ramsey fan and he starts you off with a baby emergency fund, you pay off your credit card and other debts and then you fully fund an emergency fund. We generally followed his plan but I continuted to add to our emergency fund even while we were paying down our debt because I was worried about the economy back in 2007. We got our debt (except the mortgage) paid off, we don’t use credit cards (except for travel or business expenses) and we continue to add to our emergency fund but not at the expense of other savings goals.
Suze is America’s goof ball. Only financial novices listen to her act.
I apologize if this has been posted before as I’m short on time and couldn’t read every post, but I recently heard the best ‘rule of thumb’ for size of an emergency fund that I’ve heard to date.
Simply, save one month for each percentage of unemployed workers in your area. For example, if you are in LA with an unemployment rate of 11%, you should ideally have 11 months of income saved. If your area’s unemployment rate is 5%, you should have 5 months of savings.
Both my cards just raised my limit, one by 25% and the other by 50%. What does THAT say ?(except maybe that those who pay off every month are no longer the detested scum of the CC world)
My mom (elderly, over 80) told me that she is deliberately not paying off her credit cards in full because Suze Orman said not to on TV. Now she’s getting calls from the credit card collections departments. She could be paying these cards off in full, but now she has money under her matress and a trashed credit report. THANKS, SUZE.
Wow. Suze says to save cash for when things go wrong. Brilliant. Gee Suze, how did you come to this amazing conclusion? No shit bimbo. Common f’ing sense tells you to have emergency cash on hand. I just bet her book is filled with all kinds of other common sense type things. Buy her book; it will be money well wasted. Seriously, this hooker needs to find another line of work if she can’t come up with anything worth while. Her and her book remind me of when celebrity bitches put out an exercise book that later turns out to be bullshit.