paying off 5-6k in CC debt?

[Red Squirrel]

This is VERY bad advice. Do not use up your savings. If you become unemployed you will need available cash much more than an empty credit card balance.

If you have cash, but you also have debt, then technically, you don't really own that cash anyway.

You always pay off debt if you can. It's costing you. THEN build up an emergency fund. It makes no sense to sit on a pile of cash and have it be slowly eaten away by debt interest.

 

[Jumpem]

If you have cash, but you also have debt, then technically, you don't really own that cash anyway.

You always pay off debt if you can. It's costing you. THEN build up an emergency fund. It makes no sense to sit on a pile of cash and have it be slowly eaten away by debt interest.

I disagree. Because if you lose your job just at that point where you are starting to build up savings again you will be in a bad spot. You won't have any cash on hand to continue paying your bills.

I wouldn't go below $15-20k of savings. Get that cushion accumulated, and then think about debts.

 

[heymrdj]

I disagree. Because if you lose your job just at that point where you are starting to build up savings again you will be in a bad spot. You won't have any cash on hand to continue paying your bills.

I wouldn't go below $15-20k of savings. Get that cushion accumulated, and then think about debts.

This is what I was pointing out earlier. It's very important to not drain all the savings because if you lose your job during the transition from having all CC's paid off vs loosing all your liquid you'll be in a very bad spot. I can say this because I did exactly that last year and I was in a bad spot. I had 7K in debt in August 2011. I paid it all off out of savings. I lost my job in October 2011. I had enough savings from paying off debt to live on cash for just 5 months. Sure you can skip daisies and say everything will be fine, but I got to December before I finally was hired (meanwhile getting that "you're overqualified" statement on everything I applied for). Not enough money to relocated, and savings draining fast is NOT a fun position to be in. That 7K was enough to live another 7-8 months on top of the 5. Instead I had to sweat weekly as I watched it tick away and as I learned that I couldn't pay my rent with anything but cash or debit card.

 

[Vic Vega]

If you have cash, but you also have debt, then technically, you don't really own that cash anyway.

You always pay off debt if you can. It's costing you. THEN build up an emergency fund. It makes no sense to sit on a pile of cash and have it be slowly eaten away by debt interest.

This is poor advice especially if you have sworn off credit and are resolved to handle emergencies with cash.

If you have $20,000 in cash and $20,000 of debt and pay the debt off using the cash, if tomorrow you have a $10,000 expense you are back to using credit because you didn't leave yourself any room - that is, unless you can replenish $10,000 in savings overnight. I know I can't.

Resolving to pay off debt is a GOOD thing and using savings to do it can also be a good thing. Not planning is a BAD thing. I don't care how many times Dave Ramsey says to dump all your cash at debt and only have $1,000 in savings while you do it - it's still poor advice. Is the debt costing you money? Of course it is but as I already said, if you go down to zero and have a large expense, you are right back to sucking the credit tit.

 

[Demo24]

We don't know how much he has saved up. If you have 6-7k saved, then hell no. 10k...maybe pay off half of it. 10k and up, I'd go ahead and get rid of it all.

Personally I'd probably drop at least 1k on it and then pay double the monthly until I was in a situation to do it all quickly. Don't bother with trying to save up another 6k to pay it all off (unless you foresee some financial hardship), the interest doesn't go in your favor these days.

Been doing the same thing myself, although a number of expenses delayed that final pay off on card one for longer than i anticipated. Managed to knock a third off my 2nd card, although rest of this year will be a bit expensive so I will probably end up carrying a slight balance. Key here though is to keep it manageable and not let it spiral out of control. I may not have 1k that I want to immediately liquify or take out of savings, but if necessary I could and there's a plan to get rid of that cost.

 

[jagec]

I disagree. Because if you lose your job just at that point where you are starting to build up savings again you will be in a bad spot. You won't have any cash on hand to continue paying your bills.

I wouldn't go below $15-20k of savings. Get that cushion accumulated, and then think about debts.

That's a little crazy high IMHO...particularly for someone who is younger. As an absolute minimum you need a month of cash reserves, but ultimately you can convert credit to cash pretty easily, and the hit that you'll take if you get a cash advance is less than paying off the interest on a $6k balance.

 

[heymrdj]

That's a little crazy high IMHO...particularly for someone who is younger. As an absolute minimum you need a month of cash reserves, but ultimately you can convert credit to cash pretty easily, and the hit that you'll take if you get a cash advance is less than paying off the interest on a $6k balance.

Are you sure about that? Most cash advances I see involve a fee of at least 4%, and they charge a separate interest rate of 20-30%. They are the worst form of loan you could possibly take out when you least need to be taking it out. I've seen poorer folks get inside a death spiral having to take them out. I mean if you get lucky and get rehired within a month you can do well, but that is NOT a risk to take in this economy. In these times, a high percentage of those that become unemployed will be unemployed for awhile.

 

[DrPizza]

OP, you did not provide enough information for people to give you appropriate advice. E.g., people are planning on worst case scenarios - that you lose your job, or otherwise are unable to work. The likelihood of that varies tremendously from person to person. Some jobs have a lot of job security. Okay, what about getting sick - my wife and I can each be sick for at least 6 months without any loss in income. Hers is a little less accrued sick time, as she's allowed to cash in half every time she hits 500 hours; but she has better long term disability that would be supplemented by sick pay.

Like any investing, there are varying degrees of risk. Those who say "don't use any of your cash reserves" apparently believe in absolutely zero risk. But, if you're like the average person, using all your cash reserves does put you at increased risk of being screwed for years - regaining the debt, plus when you're late after the first 30 days because you can't make a payment, you get late fees + the default high interest rate.

But, perhaps there's a happy medium somewhere in between... Pay a significant chunk of those cards, while leaving enough cash to cover you for a couple of months. How long you need to cover yourself depends a bit on the type of job you'd be seeking in case of something like a layoff. If you presently work at McD's, screw it - pay it all off and consider that you'll get hired at BK or Wendy's the next week. But, if it would be expected that it might take several months to land a new job, then you should consider reserving more of that cash. Still, though, after paying down a significant chunk, you'll have lower payments each month, so can afford to rebuild your savings quicker. Finding the right happy medium is up to your individual circumstances. The more risk you take, the higher the payout could be for you. The less risk you take, the more you end up spending on interest. How much risk you should take depends on your age, health, type of career, monthly expenses, how well your company is doing, etc.

edit: and if you're plunking down a chunk of your savings, but not paying them all off, pay off the higher interest rate ones first. Don't just divide up the money evenly across the cards.

 

[Vic Vega]

That's a little crazy high IMHO...particularly for someone who is younger. As an absolute minimum you need a month of cash reserves, but ultimately you can convert credit to cash pretty easily, and the hit that you'll take if you get a cash advance is less than paying off the interest on a $6k balance.

Crazy high? How about all those people 2008-2011 who lost their homes because they first lost a job. $15,000-20,000 could have paid a mortgage for a year while they looked for another job, instead they lost their home.

I'm perfectly OK with a young person living with mom and dad until they have $25,000 or so in the bank. Not everyone can do that but those who can should take advantage of it.

 

[OBLAMA2009]

i have about 5-6k in credit card debt and am getting tired of making minimum payments on several cards. whats the best way of paying this off? i have the cash to pay it off but would rather not use it for this. last time i got a personal loan from my bank and paid it all off. is there a better way of doing this? i know personal loans dont offer the best interest rate. a coworker of mine recommend doing a balance transfer but im not too sure.

i would pay it off (or a significant part of it) if you have the cash unless you have it at a really low interest rate (like <3%)

 

[shabby]

i have about 5-6k in credit card debt and am getting tired of making minimum payments on several cards. whats the best way of paying this off? i have the cash to pay it off but would rather not use it for this. last time i got a personal loan from my bank and paid it all off. is there a better way of doing this? i know personal loans dont offer the best interest rate. a coworker of mine recommend doing a balance transfer but im not too sure.

 

[DrPizza]

Crazy high? How about all those people 2008-2011 who lost their homes because they first lost a job. $15,000-20,000 could have paid a mortgage for a year while they looked for another job, instead they lost their home.

I'm perfectly OK with a young person living with mom and dad until they have $25,000 or so in the bank. Not everyone can do that but those who can should take advantage of it.

Again (see my earlier post) - we don't know what the OPs situation is. Some people, $20k would cover just 3 or 4 months of a mortgage payment, some people, it would cover the mortgage for 8 years.

 

[Vic Vega]

Again (see my earlier post) - we don't know what the OPs situation is. Some people, $20k would cover just 3 or 4 months of a mortgage payment, some people, it would cover the mortgage for 8 years.

Absolutely, so as general advice because we DO NOT know, my above post stands. You can substitute the numbers as you like, home prices and salaries are vastly different around North America, obviously one size does not fit all though the ratios are consistent across regions (salary to average home price) so the advice is sounds.

 

[bradley]

I would familiarize yourself with the "YAGT: OMG I love guns" thread.

Better yet, familiarize yourself with Dave Ramsey. Paying off your debt is going to take a lifestyle change and self-sacrifice.

http://www.daveramsey.com/radio/home/

 

[the DRIZZLE]

To the people saying that credit cards can be used instead of an emergency fund: Remember that there may be a strong correlation between your ability to get credit and you losing your job. If we have another financial crisis you may find yourself laid off just as credit dries up.

But as others have said we don't have anywhere near enough information about the OP's situation to give him useful advice.

 

[Vic Vega]

I would familiarize yourself with the "YAGT: OMG I love guns" thread.

Better yet, familiarize yourself with Dave Ramsey. Paying off your debt is going to take a lifestyle change and self-sacrifice.

http://www.daveramsey.com/radio/home/

Ramsey tells you to dump cash into debt while not using credit and only holding $1,000 in cash. Not real smart if your goal is to drop credit cold turkey, one major expense and you're back on credit. The more rational and feasible solution is to both save and pay down debt at once until you reach a point you are comfortable with on the savings side.

Please don't come back with "if you don't have the money then you don't buy it" nonsense Ramsey spews - this works fine once you have money. People say that until they get a hole in their roof and now need $15,000 for a roof or the transmission takes a dump and need $3,000 for a transmission, hard to fix those problems with $1,000.

Ramsey has a lot of GOOD ideas like living debt free, avoiding credit and paying cash. Where he goes wrong is how to get there. He expects people to assume colossal risk by having virtually no savings and not using credit. This is poor advice.

 

[DrPizza]

Ramsey tells you to dump cash into debt while not using credit and only holding $1,000 in cash. Not real smart if your goal is to drop credit cold turkey, one major expense and you're back on credit. The more rational and feasible solution is to both save and pay down debt at once until you reach a point you are comfortable with on the savings side.

Please don't come back with "if you don't have the money then you don't buy it" nonsense Ramsey spews - this works fine once you have money. People say that until they get a hole in their roof and now need $15,000 for a roof or the transmission takes a dump and need $3,000 for a transmission, hard to fix those problems with $1,000.

Ramsey has a lot of GOOD ideas like living debt free, avoiding credit and paying cash. Where he goes wrong is how to get there. He expects people to assume colossal risk by having virtually no savings and not using credit. This is poor advice.

"Colossal" is an exaggeration. Especially when you stop and consider that the vast majority of the people in this country have no savings. (Though, I suppose that for them, it doesn't even apply to spend their savings on debt.)

 

[Vic Vega]

"Colossal" is an exaggeration. Especially when you stop and consider that the vast majority of the people in this country have no savings. (Though, I suppose that for them, it doesn't even apply to spend their savings on debt.)

That's the point you're missing. People have no savings because they have and are using available credit for emergencies (and let's face it everything else).

If you tell someone to stop using credit (a good thing) and short-mid term only hold a $1,000 cash (a bad thing) that is in fact a colossal risk because the first the major expense which comes along will wipe you out and YOU'RE GOING to use that credit card because you have no choice. It's like telling a junky drug dealer to keep his job selling drugs because it pays well - eventually he is going to take a hit and be a junky again. Credit works the same way.

Setting yourself up for failure is not smart. Ramsey is teaching an ideology and granted it's one I do subscribe to, no credit, pay cash, live below your means. For people currently in debt and massive debt it's not a practical system for managing your money in the early stages.

 

[bradley]

Ramsey&#8217;s advice appears far sounder than those unrealistically wanting all reward and no risk.... or those who see sacrifice as some old-fashioned sappy anachronism.

Anyway, our artificial world only shields those with money/power from risk. Bank's very survival depends on your perpetual debt.

Although Dave's best message is facing problems head-on. Meanwhile the average American gives more thought to maintaining their car's road worthiness than their own financial well-being and health.

 

[Vic Vega]

Ramsey&#8217;s advice appears far sounder than those unrealistically wanting all reward and no risk.... or those who see sacrifice as some old-fashioned sappy anachronism.

Anyway, our artificial world only shields those with money/power from risk. Bank's very survival depends on your perpetual debt.

Although Dave's best message is facing problems head-on. Meanwhile the average American gives more thought to maintaining their car's road worthiness than their own financial well-being and health.

Living with a hole in your roof and not using an available credit card to fix it because you do not have the cash is not a noble sacrifice, especially if you had the opportunity to save money for an emergency such as this and did not (hence the need for credit).

Risk-reward is not as black and white or as simple as your make it. Ramsey's ideas for eliminating debt sound good on the radio because they are hard line and emotional but then practicality sets in, something he rarely speaks about.

Should people pay off debt? Absolutely. Should people avoid unsecured credit? Absolutely. Should people pay cash for what they need and live within their means? Absolutely.

Should people stop paying their mortgage because they lost their job and the last year they have been paying down debt and only have a grand or so in the bank?

You can answer that one.

 

[zCypher]

What are your living expenses and income? Are you in a stable job? Are you unable to make more than the minimum payments? There are a lot of balance transfer deals out there that would cost you very little interest compared to your current scenario, look them up.

The interest accrued is bad, sure. You have to take into consideration all of the factors though. How likely is it that you will need some of your savings, for something that you may not be able to use credit? Maybe paying a bit of interest is worth it if it forces you to discipline yourself and learn your lesson the hard way. Better to pay a bit of interest and learn your lesson than get stuck in a situation that's even worse than paying a bit of interest.

Whatever you do, don't just keep paying the minimum payments. How many different credit cards are there? Take the highest interest highest balance card and make the biggest payments to that one. Don't over extend your payments. You don't want to be borrowing more on credit because you spent too much trying to pay it down. Leave yourself enough money to get by without touching the credit cards.

Hope this helps. There's a happy balance to be had in there somewhere, you just have to find it.

 

[bradley]

Financial sacrifice *to me* means taking a second job and giving up life's pleasures (which encompasses so many material things.) I hear Dave give this advice lots as well.

You pick yourself up by your bootstraps and stop living a net negative life, just like our grandparent's generation.

 

[Vic Vega]

Financial sacrifice *to me* means taking a second job and giving up life's pleasures (which encompasses so many material things.) I hear Dave give this advice lots as well.

You pick yourself up by your bootstraps and stop living a net negative life, just like our grandparent's generation.

No dispute there, of course that's not Dave's idea anyway, like you said our grandparents did this.

 

[rommelrommel]

Why treat credit cards like they are toxic? I haven't carried a balance in 13 years, and I get to use someone else's money for a month, accrue benefits, it insures my purchases (I got 4 years worth of yearly fees back on a ruined coat) and have got a few flights out of it, could cash out my points for a few grand worth of visa gift cards if I needed. The OP hasn't expressed any reservations about his ability to use credit (although some is inferred from having taken a personal loan previously to pay off CC and having made minimum payments for some time.) This idea of people generally having 20k+ in cash sitting around for emergencies is a great ideal but we all know it's not reality AND not realistic for everyone... especially to pay 5-20 times or more as much interest as cash can bring in. OMG pay cash for everything is for people with no self control.

Risk/reward I would say pay it all off. Unless you're facing a reasonable chance of needing that cash ASAP it's going to pay off.

 

[randomrogue]

One of the first rules of creating any kind of wealth is to get rid of high interest credit card debt. You should have paid this off as soon as you could. Use your cash, pay off your debt, and then go read a book on money management