Updated: 9/22/2010 9:00 AM ET|
Bad advice from Suze Orman
And now, more than ever, you should protect your credit scores. People with mediocre or poor scores are missing out on some of the best interest rates on loans since the 1950s, and they pay more for insurance as well, because most insurers use credit information to determine premiums.
Good scores, by contrast, get you better deals on loans as well as the power to fight back against rate increases and lower limits.
When Orman is right
There are circumstances where paying the minimum or, preferably, just a bit more is the best of bad options. That's true if:
- You've been or are about to be laid off. In general, you want to hoard cash when you lose your job. You should cut expenses, look for other sources of income and delay debt repayment plans until you're back on your feet.
- You're on the financial brink. If you're living paycheck to paycheck, you have no savings and a layoff would send you over the edge, then paying minimums may be appropriate. Look for expenses you can cut and funnel the extra cash into savings. If you're in really deep, consider talking to a bankruptcy attorney.
- Your accounts have already been frozen. If you won't be freeing up additional credit by paying down your debt, putting that cash into savings might be the better option, especially if it's relatively low-rate debt.
If your situation isn't so dire, however, a more balanced approach might be the best course. That means:
- Staying the course. Continue paying down credit card debt, but look for extra expenses to cut to pad your emergency fund as well.
- Opening 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.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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The reason why a lot of CC users have maxed out cards is they do not have any emergency back up funds to work with, so they use their cards for fixing cars, taking an emergency trip, ie., which in some cases will max them out.
Everyone should have the cash available to pay for emergencies and only use the card or other credit when they can pay the balance each month. If they don't have emergency funds, they shouldn't purchase anything with a card. They should live without until they can afford to pay for it directly.
If they have gotten into bad debt and do not have the savings, I agree they need to build up the savings anyway they can, even if it means paying minimum on the cards. A good Credit Union will have programs to help people with their credit card debts and most will make the person requesting help have an emergency fund. To do that, they will work with the Credit card companies to set up a schedule of payments and put some away in an account along with setting up a good budget.
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