Friday, December 4, 2015

Should I Pay Off My Credit Cards Before Saving Money?

Credit-cards
By Lotus Head from Johannesburg, Gauteng, South Africa (sxc.hu) [GFDL (http://www.gnu.org/copyleft/fdl.html), CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/) or CC BY-SA 2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/2.5-2.0-1.0)], via Wikimedia Commons


There's a lot of financial advice out there. Some is contradictory, some is common sense, and a few pieces of it are honestly kind of useless (hint:  if your advice is to drop my $5 a day latte habit so I have more money, you obviously think I'm less broke than I actually am). Personal finance tips are just like any other piece of advice, in that you have to pick and choose what works best for you. Here's my two cents.

A big question if you're in debt is whether to start paying your credit cards down first, or to put back emergency savings before anything else. Conventional advice is to do the latter, but in my opinion, it depends on the situation.

Situation A:  you are beyond the credit limit for the card, and will not be able to make any new charges in the foreseeable future.
In this situation, I would definitely recommend going with conventional advice and building up your emergency savings while paying the minimum payment. You need to have a backup plan in case things go south, and an emergency savings account is the best way to do it. Once you have at least three to six months of living expenses saved, then go ahead and start focusing on your debts.

Situation B:  you have the majority of your debt on store credit cards.
This is another situation where convention holds true in most cases. If you focus on paying off your Kohl's card, that's great, but when you need to pay the light bill a cute cardigan won't save you.

Situation C: you are at or below the limit on a conventional credit card.
In this situation, I would recommend throwing convention out the window, and here's why. If you're truly broke -- not 'can't afford the second car/bigger house/giant t.v. that I want' broke -- you need as much money as possible available as quickly as possible. An emergency fund would be ideal, but while you're building that, more interest accrues on your debts. Better to pay down those credit cards and take the risk that you may have to fill them back up than to spend an extended period of time building an emergency fund while accruing possibly hundreds of dollars in interest while you're paying the minimum balances. Keep in mind, however, that once your conventional cards are paid off, it's better to leave the store credit cards for after you've got a few thousand dollars cushion built up.

Every financial situation is unique, and in the end you have to make the final judgment on your own budget; hopefully, however, you can employ this and other strategies to build a plan that will take you from hardship to success.

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