Pay Off Your Credit Card Debt? Or Stockpile Cash?
Personal finance guru Suze Orman is changing her tune about credit card debt. Before unemployment reached a 26-year high — nearly every expert advised people to pay down their credit card debt before starting an emergency fund. Now it seems that the advice has changed.
"If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can," Orman said on the program.
Why would such a fundamental lesson change? Well, because the odds have changed. In general, during a time of rapidly increasing unemployment — people are much more likely to be plunged into crisis in the short term — meaning that you're not necessarily saving for a rainy-day-far-off-in-the-future disaster — but one that might happen soon.
Let's face it, if the sh*t really hits the fan — you'll want to have some cash on hand. If you already have an emergency fund saved up... great! Pay off your credit card debt!
Suze Orman and the New Rules of Credit Card Debt [US News & World Report] (Thanks, Erik!)
(Photo:dooleymtv)
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This makes sense, Unless you are going to hit the credit limit, or you are at a really high interest
...I don't get this. If you have, say, $100 extra each paycheck that you could either save as cash, or use to pay down a credit card, and you just save it as cash for "emergency use" how is that possibly better than paying down your credit card by that extra $100, avoiding a little extra interest next month, and in the case of emergency using your credit card?
@YouDidWhatNow?: Bc your credit card company will cancel your account when times get tough and you will have not recourse for paying bills and buying groceries . . .
@YouDidWhatNow?: Because credit cards are slashing credit limits. Everywhere.
You have no guarantee (once something bad happens and you need some money) that your credit card will have the same credit limit.
I think what it really means is people need to start thinking for themselves instead of just listening to whoever Oprah, Dr. Phil, CNN or whatever TV station throws at you. Do your own research. Look at your own situation. Seek true professional help if needed. There is no magic answer.
Didn't Dave Ramsay advocate emergency fund before paying off your credit cards? Or is my dyslexia acting up.
@YouDidWhatNow?: The issue with paying off your credit card and relying on the untapped credit limit in the case of an emergency is that the credit card companies are currently reducing credit limits left and right. If you have a $4K limit and are at $3500, and you pay it down to $2K, don't be surprised if your credit card company reduces your credit limit to $2001. At that point you would owe less, but you wouldn't be have funds (either cash or untapped credit) to cover emergency expenses.
@YouDidWhatNow?: From what Suze Orman, the reason to keep the emergency cash fund is because you can't count on the credit card companies to maintain the credit limit. They can drastically reduce your limit at any time. So you should have moderate emergency cash, and once that is built up, start paying off your credit cards.
Because many credit cards are currently dropping the credit limit on existing accounts. So, potentially you could find yourself down the line with neither savings nor available credit to help yourself in the case of a financial emergency.
From what Suze Orman said*
@YouDidWhatNow?: also, there are a lot things that are not payable by credit card (like rent, morgages, car payments, etc.). if you lose your job and have no savings, you can be very screwed in making payments toward things you own. so, she is saying its better to have some emergency funds now that its likely you will lose your job. keep the debt on the card and prepare for the possibility of lost income. its not ideal, but it could keep your in your house should something happen to your job.
@ZenMasterKel: What recently changed is that the credit card companies are lowering credit limits for many people. There wouldn't be an issue if the CC companies were simply leaving unused credit limits alone. The strategy of paying off credit card balances made more sense in the past than it does today.
I guess if you sit there saying enough eventually something you say will be right on the money.
Did someone mentions the credit limit? Oh dear god don't forget to mention the credit slashing. It's horrendous.
She's an idiot.
If you think you're gonna be unemployed, yeah, stockpile the cash.
But if there's a reasonable chance you'll retain your job (as 75% of people will) then there is ABSOLUTELY no reason not to pay off the card, and get off the credit train ASAP.
I wonder how much the credit industry bribed her to change her stance?
This still all depends on your situation. It would be, literally, impossible for me to lose my job before July 2010, so I'll keep paying down my debt, thank you.
@Inka Dinka: But banks are cutting credit limits below balances, too. So having a balance is no guarantee that you'll keep a high credit limit.
Plus, keep a balance just to keep your credit limit? That's not a very good reason. If you have a $4,000 limit and a $3,500 balance, you have $500 of credit left. But if you pay it off, you'll have $4,000 of credit. Sure, banks are cutting limits left and right. But until your limit is cut to below $500, you're still better off than when you had the balance. Plus you have no debt.
@WindySaturday_GitEmSteveDave: He suggests a "baby" emergency fund (around $1000) before you pay down debt and a 3-6 months emergency fund after you pay off everything but the house.
Having 3 months of emergency funds should come before unsecured debt, but after that it's an absolute necessity to be paying off debt starting with high interest, secured loans, and working your way down to unsecured, low interest loans unless you have a compelling reason not to at least until things are under control.
"Why would such a fundamental lesson change? Well, because the odds have changed. In general, during a time of rapidly increasing unemployment - people are much more likely to be plunged into crisis in the short term - meaning that you're not necessarily saving for a rainy-day-far-off-in-the-future disaster - but one that might happen soon."
I think the bigger reason is that the credit card companies are getting skittish and reducing limits and canceling cards. If that were not happening, it would still be better to pay down debt. IF your source of income disappeared, you'd then use your credit cards to make purchases. You'd be paying the same interest rate that you would have paid if you had stockpiled cash instead of paying down debt. Only difference is that stockpiling cash guarantees you'll pay that interest, and losing your job is not guaranteed. You would come out ahead by paying down debt AS LONG AS nothing happens with your credit cards (rate increase, limit reduction, etc).
At a time when credit card companies are acting unpredictably, this advice she is giving is good advice.
But I've been working so hard this year trying to pay off my credit cards. I would hate to lose momentum now. :(
@JGKojak: I agree with you, I understand why people listen to her and others like her because they come across as experts with a vast amount of experience. Seriously, though, wouldn't it be in her best interest to give some false information so people aren't 100% fine, so they would keep buying her products and watching her show so she can generate advertising revenue?
Honestly, trust your gut instinct or the advice of a professional, not some woman hawking shit on TV...
/note: I know who Suze Orman is, my point stands...
@ZenMasterKel: The game has changed. Her advice made sense then and the change makes sense now. Are you upset that someone can shift their opinions with a changing market? Seems like you're the dumb one here.
I am trying to figure out why reducing interest paid is bad, I can pay down credit and not CLOSE the line of credit, so if it hits the fan I can just use it. My savings nets me nothing in terms of interest, and my credit debt slaps me around.
This is where I am, right now.
I was unemployed for most of 2005, and had a series of kind of unexpected and large life events and disasters since then, and so went cruising into an interstate move and new job in April 2008 with some (not an ungodly amount, but more than I wanted, certainly) credit card debt and about two bucks in my savings account.
In the year since I started that job, I could have my credit card debt down to about $500 but I thought it was more important to be building a savings account in case the shit hits the fan. This is not to say I haven't been doing both; my card has an excellent interest rate and excellent terms (it's a USAA card and hasn't been over 10% since, I think, 2003?) and although it has no set minimum payment I make a point of sending it every penny I can most months, including the overwhelming majority of any bonuses or cash gifts I receive.
But as good as that card is... if my fiancé or I get laid off this year, Mastercard can't pay the rent.
@YouDidWhatNow?: My response is going to be different depending if you're trying to be snarky or if you're being genuine.
If you're being genuine: Some credit card issuers have some pretty terrible looking balance sheets right now. They have to reduce the credit they're offering to decrease their liabilities, as CC debt is unsecured. Credit card companies are slashing credit lines, and if you find yourself in a terrible spot of unemployment, you're going to look like a good target for a rate increase AND limit decrease. CASH IS VERY VALUABLE RIGHT NOW. You have to pay interest on the debts you owe, but that is a small cost when you consider that you're basically buying insurance on your own finances by having OMG I'M BROKE protection.
If you're being snarky: If you have been paying attention to anything involving finance at all within the past year, you would know the answer to your question. Someone who simply scrolled past Bloomberg or CNBC, not even staying to watch the program, would know this. Now go read the above paragraph.
On a fun note, I got a credit line increase today. Yay!
@Raekwon: I think "thinking for themselves" is how most people got in this terrible mess because they're financially illiterate.
Suze Orman, as much as I'd like to hate her, gives pretty reasonable advice considering that her platform, finance, is pretty difficult to offer without tailor-making it for an individual.
If you are lucky, the crdit card companies will go out of business and settle for less than what you owe. Then you will have the emergency moneyto use instead of the stupid credit cards. All they are doing is raising interest rates, slashing crdit limits and then charging you over the limit fees because you do not have enough of a crdit limit left to cover the interset that they charge.
@DePaulBlueDemon: Then you should figure out what's best for you and take her advice with a grain of salt. If you feel that paying off your CCs as you are now is better for your life goal, do it. Sometimes I scroll past her program while flipping through channels, and I'm pretty sure her advice in regards to paying off CCs vs. building an emergency fund is "What will you do if you don't have a job tomorrow?"
If that is a realistic worry for you, consider her advice. If it isn't, continue on. I think the point here is to get you thinking about potential futures and outcomes, not to tell you directly what to do. People, in general, are pretty god-awful at planning or predicting outcomes. She's trying to help those people.
@rugman11: Because it's, literally, impossible for you to get sick or injured and be out of work for some reason other than a layoff? With the current situation I think people need to be prepared for more than just industry-wide cuts and look into more what-ifs that in previous years.
@YouDidWhatNow?:
Well if your landlord / mortgage company takes Visa maybe that will work, but from my experience they only take checks / direct deposit, so your credit card won't be a whole lot of help if you find yourself having to live with no income for a number of months. Same goes for student loan repayment, etc...
@PrincessSparkle: I could get sick or injured even if there wasn't a recession. The reason she's advocating for the piling up of cash is because the possibility of losing your job as a result of layoffs or cuts is higher than normal. If that isn't a potential problem for me, why should I change my strategy?
@billlnv: I HIGHLY doubt that ALL of them will go out of business.
Plus, I kind of need them to function.
The only problem with this strategy, is what happens when your credit limit gets slashed to less than the balance you're carrying.
Consumerist, please! Be a little more mindful with these posts. The Suze's idea may have merit, but we shouldn't be encouraging paying off the minimum due, especially when the minimum due is often calculated to not even cover an entire cycle's finance charges!
Better advice than a flapping head's: study your own circumstances and decide just how much money to devote for paying off debt and for putting in savings. With recent developments in the credit industry, it is now no longer a safe bet that you can fall back on credit in an emergency, so take that into consideration. As a rule, you should always pay more than the interest accrued per cycle on each debt you own whenever possible.
@rugman11: Ah, I see what you mean. I took her change to be more related to the credit companies lowering the limits as soon as you pay them down. Even before I heard of her change, I had to change my strategy a bit because 1) my cc limits were dropping by the thousands and 2) I work in advertising, so I have a huge layoff target on my back.
I've actually been doing this for the last few years. I put all my extra money in savings and then when I have enough savings to pay off the debt and still have enough savings left over to feel comfortable I pay off the debt. It may cost you slightly more in interest, but I personally think the cost is worth the piece of mind having a safety net gives you.
I currently only have a single student loan as debt and it is on a payment plan. My personal goal is to live my life going forward without any debt whatsoever. That is my definition of wealthy and I am well on my way to achieving it.
@kylere: it might not be up to you to keep it open. the reason she changed her view is b/c cc companies are lowering people's credit line, sometimes to levels below their current balance.
@rugman11:
Yes but just a baby emergency fund of a $1000 not a full fund. Dave promotes starting with a small e/r fund because as you pay off your debt some type of e/r will pop up and you don't want to back slide and have to charge that emergency on your credit card.
@Scuba Steve: Indeed, SCUBA Steve. It's like no one bothers to check the responses, they just blurt out the answer.
Pretty much. And unfortunately, being financially literate is beyond the intellectual capabilities of many people.
@chrisjames: I thought they passed a law a year or so ago saying your min. payment was require to be more then the finance charge?
@DePaulBlueDemon: You can go back to paying minimum +10% or whatever your low payment is, but just don't start using the cards again.
@rugman11: Unless your employer is both more than solvent (e.g. doesn't have spare cash in Ponzi bank and trust) AND is legally required to pay you income for the next two years, anything can happen. There could be some disaster. Your "safe" job could still be reduced, outsourced, or something. If your strategy takes that (and potential disability, sickness, etc.) then fine.
Even the government might cut back, and faster and in unexpected areas.
@kylere: If you are laid off, can you pay your entire monthly bills with unemployment for the allowed period (include the waiting week and whatever else)? For 6 months or more? If not, it is better to build up a reserve so that you won't go into default.
@idip: My credit card payment sure isn't. My minimum, after hovering around $100 for a month or two, was steady for a long time at around $10. For the last few months or so, for some reason, the minimum due is stuck at $0. My monthly finance charge is slowly decreasing from $50. I don't know or care why any of this is. I pay large chunks every month irrespective of amount due.
Maybe the rule covers loan or other financing installments. Regardless, paying only the interest is still a terrible approach to debt payments.
It wook her years to figure this one out? I guess people yelling at her for giving them bad advice has made her changer her tune.