The Queen of Personal Finance or Ugly Vests, whichever you prefer, recently shocked followers when she announced on the Oprah Show that it's time for some people to finally give up on paying down nasty credit card debt and stash their cash instead. What? I'm sorry Suze, but you really blew it with this one. Paying the minimum balance on credit cards is now and always has been a poor financial decision.
Yes, it's important for us all to have an emergency fund in times of great economic uncertainty, but why should anyone rack up credit card debt at 20% or more if they have the financial means to pay it down? Orman's exact words were, "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." Suze's point is that unemployment is skyrocketing, credit card issuers are cutting limits and closing accounts, and people may soon find themselves without a job and no access to credit. I can't argue that all of these things are a concern right now, but as usual, Suze is making a sweeping recommendation that really isn't as simple as she makes it sound. Maybe it is a good idea for some people to cut back on their credit card payments if their employment is on shaky ground and they need to pad their emergency fund, but only paying the minimum balance is a mistake. Racking up more credit card debt should never be part of preparing for a financial emergency. I've never been a big fan of Suze Orman, although one can't deny she is an expert at oversimplifying financial decisions and convincing newbies that she is the Goddess of Personal Finance. The incredible success of her show, books, and seminars is certainly proof that she knows how to preach to the masses. Unfortunately, I think she's leading them astray this time. What do you think of Suze's latest advice?
Comments
Josh,
Great article! Well said. It makes absolutley no sense to stash cash when you're racking up debt at a 10-20% rate on the side.
Every single dollar of unsecured debt you have offsets your emergency fund. Making minimum payments on your credit cards is ignoring your fundamental financial problem, not being smart with your money.
It is an much better investment to take out your credit card debt before you build your emergency. This creates extra cash flow to your household, which is the lifeblood of your financial plan.
Keep up the good work!
Kyle
If you don't have enough money to pay your bills and you sense bankruptcy is coming, Orman's advice might make sense.
I agree that Suzy's advice was overstated and overly simplified. However I completely disagree that Suzy's Oprah audience aren't that "bad off". The moderately well to-do have trust attorneys, fathers, husbands and sons who advise them, they just watch Suzie for lunch chat subjects and to entertain themselves on how bad off others are. (Now that I'm back in the black, I am back in such circles again.)
It is important; however, to understand her audience. She is large with single moms, and women with bad credit in general,in large cities where credit card debt is charged off after 12 consecutive months of non payment and not enforceable by the shark-like agencies who by the debt for 75cents on the dollar. Like NY.
That being said, it is useless for a mother of eight to keep sending $25 per week to a card who's balance (after repeated loanshark-like fees) is over $2,000+, if she's living paycheck to paycheck because:
1. The credit card company will eventually see that they will make more charging off the full debt amount within that year and get a tax break similar to getting a full payment from the loanee, or
2. they will cut her available limit or cancel the card and her efforts to keep the card current for "future use" will be for nought and
3. she could loose her job and the payments she's making which barely scratched the fees (and/or an available balance reduction) has left her with still no available credit; therefore she can't rely on the card to cover the cost of toilet paper.
In these cases, better to pay the minimum balance and look "current/paying as agreed" on her credit report at $10 a week and bank the $15 per week, than to pay the $25 and look "current paying more than agreed" on her credit report; because the latter will be totally negated if they close her account or lower her limit.
In hard economic times, Cash is King. A CFA study in 2005 year showed that "55% of women ages 25 to 34 had less than $500 in an emergency fund. And 42% of all women said they had no emergency fund at all." Combine that with State Welfare agencies refusing to accept new applicants or "out of funding", do to too many recpients, and you've got any woman's nightmare--with or without kids. This will lead to unsafe and often illegal behavior. Resulting in a larger need (foster care for he kids, incarceration costs for the mom)for social (government) dependence.
Been there--done that; got the matching shoes and hat.
"Ignoring" the debt would be to make no payment, making the minimum is mearly priotizing your financial obligations-- and self/family trumps credit card companies all over the world.
Loved your blog,though. Very well written. I just thought you were "understating" the amount of people for whom this was great advice to.
Sylvia