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.