Is Now The Time To Ignore Your Debt?
I’ve been in a tizzy ever since Suze Orman changed her tune. Last month, the ubiquitous financial guru stood before the masses and told them to “listen up”, stop paying off debt, and put every extra penny into savings.
Now, let me make this clear. I’m a HUGE advocate (borderline obsessive) for adequate savings. I personally have way more than 10 months (Suze’s barometer) socked away in cash. But to say to everyone: “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.” Huh???? That pronouncement made my head spin!!
Then I read my favorite financial columnist (the Web’s favorite too!), Liz Pulliam Weston, on msn.com. Liz did what she always does for me — made sense of what sounds complicated, or in this case, crazy.
Liz made a critical distinction Suze apparently overlooked. Such a severe approach only applies to those in dire straits. As Liz explained, the only times when “paying the minimum or, preferably, just a bit more is the best of bad options” if:
- You’ve been or are about to be laid off.
- You’re on the financial brink.
- Your accounts have already been frozen.
For everyone else, Liz advised, “a more balanced approach might be the best course.” As she astutely points out, it could take years to build up a big bundle in savings. Dumping repayment plans for a lengthy period leads to unnecessary interest, damaged credit scores, and possible victimization by lenders. Instead, Liz wisely suggests:
- Stay the course. Continue paying down credit card debt, but look for extra expenses to cut to pad your emergency fund as well.
- Open an escape hatch. If all your credit cards are with the same issuer, consider getting a card or two from different issuers so all your credit isn’t in the hands of one lender.
- Monitoring your accounts. Many lenders are trimming credit lines with little notice, so checking your credit limits at least once a month is good practice.”
- Pushing back. Card issuers are hoping you accept their changes without a fuss, but if you have good credit scores (FICOs of 720 or above), you have some leverage and should be able to get them to rescind their decisions or take your business elsewhere.
Moral of this story: Beware of experts touting one approach for all. Cookie cutter solutions can be harmful to your financial health!