After years of hearing that credit card debts should be paid off as quickly as possible, many consumers are being told to start making only minimum payments.
Some consumers are even being urged to go ahead and take out cash advances in order to boost their savings accounts. However, when you do the math and find that you are being charged 10% interest on money that is earning you 1.5%, you may think that this doesn’t seem to make much sense. You are losing money in the long run. But sometimes you have to look at a financial decision as more than simple math.
Financial advisors are currently considering something more uncertain than credit card terms and interest rates - the country’s increasing unemployment rate. Record levels of unemployment across the country reveal that more and more Americans face the financial nightmare that comes with being out of work.
A growing number of consumers are living paycheck to paycheck. Those without emergency funds find that they are unable to make their minimum payments on their credit cards and other debts. In a very short amount of time, credit scores can be negatively affected. Late fees, higher interest rates and a lower credit score only add to an already bad situation.
Experts are advising that instead of using your extra money to pay off your credit cards, you should place it in an emergency fund.
"With rising unemployment, having a big emergency cash fund is vital, even if it means curtailing your credit card repayment strategy," says financial expert Suze Orman, explaining the current trend in credit card management.
Many people have a credit card or two stashed away for emergency purposes. However, even borrowers with excellent credit have recently gotten letters informing them of a decrease in their borrowing limits. Analysts predict that new credit card regulations will cause credit card issuers to cut their limits by more than half in 2009.
However, not everyone with a credit card should max it out to cushion an emergency fund and then only pay the minimum payment each month. This may cost way more than it is worth in potential savings.
When considering charging your emergency fund to your credit card, keep in mind that increasing the amount of debt you owe will also increase the amount of monthly payments you are required to make each month. When you only make minimum payments, you are extending the length of time it will take you to pay back your credit card and increasing the amount of interest you will pay.
Before you change your debt repayment plan or start borrowing against your cards, you have to sit down and look at your entire financial situation. Is your job at risk? Where are the areas you can trim up in the event of a financial emergency? Do you have savings in place? How much money do you need to pay your monthly bills?
If you have great credit, equity in your home, a stable job, and available credit on your credit cards, you have more options than many consumers. Stay focused on becoming debt free as soon as possible. You may even find that you are able to open a new credit card or a line of credit at your local bank to set aside for emergencies.
However, if your job may be at risk and you are already tight financially, then you should start saving right now. Pay the minimum amounts you owe on your credit cards and other debts and put all your extra cash into savings. Look for ways to lower your expenses and save even more quickly.
Every consumer has different financial needs. Whether you should make debt repayment a priority in your life is dependent upon many factors. Before you make next month’s payments, sit down and take a look at what you would do if facing an emergency situation, such as a job loss. Forge a plan that will cover your family’s living necessities, maintain your ability to pay your bills, and protect your credit score.
