New Rule: Pay Only The Minimum On Your Credit Cards.

Yes, I watched Oprah. My mom called me and said I should Tivo Oprah because Suze Orman was going to be on talking about financial planning during these tough economic times. One of the biggest points she made during the entire hour was how she was now telling people to STOP trying to pay off their credit cards unless they had a very sizable emergency fund set in place. This is completely the opposite of what she used to tell people and what I always thought to be the truth too – to always pay off debt before trying to save anything more than a minimum amount of cash. I always said that carrying debt at a higher interest rate than you could earn in savings was a recipe for disaster, and most financial advisors would have said the same. But now, Suze has changed her tune quite a bit, and wants you to only pay the minimum on your credit cards until you have at least 8 months of living expenses saved up. Talk about an about-face! However, she does have some great reasons for her new line of thinking, and I agree with her.

The biggest reason she says to stop paying off your credit cards until you have savings is because credit card companies are closing a lot of accounts with a $0 balance. (And this is why I advocate using all your cards at least once in a while, so you can help to keep those lines of credit open) People used to try their best to pay off debt and not save because they figured they could just use their credit in case of an emergency. Who needs cash when you have $100,000 worth of credit available? Well, you do – because if you pay off your card, the company might just close your account entirely, taking away that fake emergency fund you had been planning on using. What would you use then? You had not been saving any cash because you had been trying so hard to pay off your debt, so without credit, you really don’t have any money available to you at all.

The other big reason she wants you to pay only the minimum and concentrate on increasing the size of your emergency fund is because it seems that every day, more and more people are losing their jobs. People who never thought it would affect them are finding themselves falling behind on car and mortgage payments. These same people thought they could always depend on HELOC’s and credit card lines to get them through any tough times, but banks are decreasing HELOC amounts and canceling cards – leaving them with no cash to cover their expenses. It is taking an average of 8 months to find a new job, so having actual cash money to pay your way for that long is very, very important. Cash truly is king in cases like this.

I have always said to get out of debt, no matter what. Debt from anything other than your mortgage, student loan, or even a car payment, can really hinder your ability to live the life you want to live. However, in these economic times, the rules have changed and I couldn’t agree more with the new ones. If you do not have enough cash saved up for that rainy day that so many people are experiencing, you need to start saving TODAY. Start paying the minimums on your credit cards and put the rest into your emergency fund. Putting off paying down your debt for a little bit can go a long way towards being more financially secure, as we all have no idea just how bad (or for how long) this economy is going to continue.

I know many will disagree with me and with Suze, but keep this in mind – if you have no credit available to you AND no cash in the bank…where does that leave you? Credit used to always be available to almost anyone who asked, but that is not the absolute truth anymore. They can close those accounts at any time, irregardless of your credit score or usage. Keep that in mind.

Like this article? Please consider subscribing to my full feed RSS. Or, if you would prefer, you can subscribe by Email and have new posts sent directly to your inbox by entering your email address in the box below. Your email will only be used to deliver a daily email and you can unsubscribe at any time.

Comments (14)

Trackback URL | Comments RSS Feed

  1. David,

    It’s out of the box thinking – I’ll give you that!

    When I first read your post, I was shocked by the advice but when I got into it….I could see that you made excellent points.

    I do think your idea is appropriate and helpful for some people but not for everyone.

    If your job is stable I could see someone using this as an excuse to stay in debt. But for the right person, this is very good thinking.

  2. dora says:

    I also saw that Oprah segment with Suze Orman. It’s an interesting about face on c/c debt. Thanks for the great post!
    But,I don’t think the use of the word “irregardless” is correct:”They can close those accounts at any time, irregardless of your credit score or usage.” It’s “regardless” of your credit..sorry.

  3. david says:

    I agree Wealth Pilgrim, but I don’t know anyone who has a stable job right now LOL. Even my brother, an accountant, has been unemployed since Jan!

  4. Katie says:

    I am one pay period away from paying down my nagging c.c. debt. What about paying it down to a very minimal balance, like $1 or even $5 to avoid getting the account closed?

  5. david says:

    Might be worth thinking about, Katie. Or, just pay it off and buy little things here and there to try to keep it open. It might not work, but it’s worth it to try.

  6. Jamey says:

    I understand where Suze is coming from and it makes sense, but it makes me a bit anxious. I’m thisclose to having my credit card paid off. I feel like my priorities are too pay off my credit card before Xmas, then get my rainy day fund sorted.
    Call me old school. But again, it makes sense.

  7. Tyler says:

    I still don’t understand this whole thing with “credit cards are bad.” Use your credit card to pay for things, and pay your bill in full at the end of the month. Simple.

  8. david says:

    Who said credit cards are bad? Certainly wasn’t me, I don’t think they are!

  9. Great post having some radical thoughts..but must say the crisis isnt bad all across especially in INDIA..(lot of your readers are from INDIA) and as such I dont think it makes sense for us to pay off only minimum due . The card companies are not in atearing hurry to close your cards here and as such one should avoind revolving money on cards.But for US, it does makes sense.

  10. Stephanie S. says:

    This doesn’t have much to do with this specific post, but I thought you might be interested in the conversation we just had with Bank of America, asking them to lower our interest rate. It really back fired on us and we won’t be asking that question ever again.


  11. david says:

    Did you tell them you would be transferring it out? I have never had anyone say no and then do those things, how strange.

  12. Stephanie S. says:

    Yep, that’s how we got transferred to the supervisor, we told them we had a 0% offer that we were considering using unless they lowered the interest rate. And then we told her the same thing.
    We followed the guidelines of how to ask for the rate reduction that I found on various financial blogs.
    I can’t believe it backfired so bad. I’m still kinda in shock.

  13. We sort of came to a similar conclusion a couple of months ago. We have no credit card debt, but we looked at our mortgage the way that others look at cc debt, and we’d been paying quite a bit extra each month. We also have six months’ expenses saved.

    But with the real possibility that my husband will be out of a job at the end of June, we stopped paying anything but the minimum required mortgage payment. We’re saving what we would have paid of course. Even if my husband is not out of a job in June, we decided to add a couple extra months’ worth of expenses to our savings. Once we have 8 months’ of expenses saved, we’ll start paying ahead on the mortgage again, so long as he has a job.

    We’ll recast the mortgage in early June if we don’t have a clear picture of his employment prospects by then, or if it looks bad. But obviously, there’s no recast option with CC debt.

  14. Carol says:

    I agree with the advice and would even add another layer. For many, the 3 – 8 months of expenses in savings takes precedence over retirement plan contributions. If you don’t and end up needing the money then you may be forced to take from the retirement plan but now with a penalty.