Free To Get Rich

Above the need for good credit is the need for personal security.  While paying off credit cards improves your credit AND provides that financial cushion (since the credit will be available if you need it), “pay off my credit cards” has been the first steps in a strategy towards financial independence.  However…

Now that the banks are closing down credit cards whether they have been recently used or not, and whether or not they have been used responsibly – it’s important in this current economic environment that we first protect ourselves, and look out for our credit scores secondly.

In the event that you are laid off, or find yourself otherwise unable to work – you must have a way of paying your bills.  You will either need credit or cash available. 

The problem with the “pay off my credit cards” strategy is that you can no longer count on having the credit available when you need it.  You may be surprised to find out that the bank is no longer interested in offering that debt availability to you.  They can reduce your credit limit, raise your interest rate, or even close out your credit card account altogether.

Since paying off credit card balances works as a safety cushion only when you can count on the credit being available when you need it, the old advice of “establish savings while paying off your credit card debt” must be sidelined until you have got enough set aside to live on if you have to.

How to Grow your Emergency Fund

• Until you’ve got your emergency plan funded, switch to paying minimums on the credit cards, and get that emergency fund in place.
• Ensure that you have enough cash to live on for at least 3 months.
• Once you’re at 3 months of cushion in your emergency fund, split your efforts between paying off credit card balances and growing your emergency fund to cover 6 months of expenses.

When you’ve got an emergency fund that is able to support you during hard times, it’s safe to resume your strategy of “pay off my credit cards” by switching back to paying off your credit card balances as quickly as possible.