Terrible Advice From Suze Orman
by Jason SteeleI have never been a huge fan of Suze. Granted, I haven’t read her books, and I have seen very little of her show on television. I did review a piece of advice from her in the past and found it wanting. Now, I see this article that I find totally baffling.
Financial Guru Advises People To Pay Their Minimum Balance?
To a savvy credit card user, this sounds like a headline out of The Onion, but that is what Suze is saying.
“If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.”
What Is She Thinking?
According to Suze: “The problem is that most credit card companies are either reducing your credit limits, raising your interest rates and are even paying you to close down your account.” While this may be true for some credit cards, I have yet to see evidence that this is happening to “most” of them. In fact, I have not had any of my credit card limits reduced. If it is true that they are raising your interest rates (it may very well be the case), than this would be the worst time in history to be attempting to pay off your balance by only paying the minimum. Paying the minimum is now and has always been a terrible practice. It will take you ages to pay it off, and you will end up spending far more in interest than you originally paid for whatever you charged.
Suze’s theory is that the credit card industry is about to fold, leaving you no access to cash, so it is better to retain your cash now so you have some emergency reserve in case you loose your job. How much reserve should you have in her opinion? Eight Months. Think about that. You are already in debt to your credit cards now, and you are wisely living enough below your means that you could pay more than the minimum, but, according to Suze, you shouldn’t. You should put that money in a bank account, where you can earn 2% interest, while paying your credit card companies 20% interest or more. Even if you were to pay the minimum balance and save 25% of your monthly take home income, it would still take you over two and a half years to save up 8 months worth of salary. All this time, according to Suze, you should be accumulating interest on your credit cards, because in her mind, they are all going to shut down soon, leaving you with no credit.
I Don’t Know Where To Begin Telling You What’s Wrong With This Theory
First, the credit card industry isn’t going to disappear tomorrow. The interest rates may go up, it may be harder to get a new card, and one of your banks may cancel their card, but the industry is not going away. Why it was just yesterday that I reported that First USA was offering a United Airlines Visa card with 40,000 bonus miles, despite every pundit claiming that sign up bonuses were going away. Not a week goes by when I am not writing about new credit cards and new promotions.
Second, Suze states that: “If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit, to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed. ” The problem here is that the more you pay down your credit cards, the more available credit you will have. The more available credit you have, the lower your credit utilization ratio will be and the higher your credit score will be. If you follow her advice, the opposite will happen. Your utilization ratio will be high, and your credit score will be lower, making it more likely that your limit will be lower on so on.
Is There Any Good Advice In There?
Yes there is, kind of. You should have an emergency plan, if not an emergency fund of eight months. Racking up credit card debt is a bad emergency plan. A good one would take into account unemployment insurance income and health insurance payments. If you have a house, a home equity line of credit is a great alternative to credit card borrowing as the interest is lower than credit cards and it is tax deductible. My emergency plan would include selling off some unnecesary assets, cutting back on all spending, and taking on extra jobs until I found full time employment again. Whatever I do, I am not planning on racking up interest on my credit cards now in order to stuff money underneath my mattress for a rainy day. In my opinion Suzu Orman’s advice is all wet already.
March 20th, 2009 at 01:44
You might have taken Suze’s advice a little further than I might have, but you make a very good point. The most fascinating observation though is that this down economy has even the biggest personal finance experts changing their own time-honored advice.
March 20th, 2009 at 03:10
Gotta agree with you on this. I haven’t read any of Orman’s books, but I do watch her show. She’s not usually this loopy.
March 20th, 2009 at 19:22
I agree with you.. any self proclaimed financial expert espousing to pay only minimum balance due on credit card debt must not be taken seriously. Credit card debt is the costliest debt to have in this world..nothing is more expensive.so why would you pay only minimum balance on it… ?? one should look to pay it off ASAP and then save for emergency fund while having his insurance done as pointed out. Suze..you got this one wrong…
March 20th, 2009 at 19:43
I also agree, though I would say that it makes sense to maybe lower the amount you pay above your minimum payments – if, say, you’re paying $100 above the balance, which is recommended. As investments are so problematic, having this cash on hand is important. Though you can also have too big of an emergency fund, $ that should be put in other areas. It takes a delicate balance, but paying only the minimum doesn’t really make sense.
March 21st, 2009 at 02:33
I didn’t seem to interpret her advice as strongly as you did. Basically I think she just wants you to build up some kind of emergency fund even if it means cutting back on your CC payments for the time being. It’s important to have some kind of cash protection in this economic catastrophe right now.
As for her statement about the CC industry pulling back, it definitely doesn’t apply to people like us who have great credit, but you must realize that Suze’s audience are mostly people on the opposite spectrum from us. They’re lower credit people who advice like this applies to more. They usually have zero savings and reduced credit.
Lastly, people hate Suze because of her TV persona. I do too. However, I have to admit that her books are a completely different transformation. Solid advice and I enjoy reading them. Since no one here has seem to read them, I think you’ll gain a better opinion of her if you ever do.
March 25th, 2009 at 10:50
[...] Credit Card presents Terrible Advice From Suze Orman posted at Ask Mr Credit [...]
March 25th, 2009 at 14:42
@ Eric: Thanks! I thought I was the only person on the planet whose teeth are set on edge by watching Suze Orman on the tube.
On topic: If you think you’re about to be laid off, you really should prioritize building an emergency fund. Better to have some cash to live on than to have to max out credit cards to eat and pay the rent. IMHO the reason has less to do with the fear that the credit-card industry is about to go under or that issuers will close vast swaths of accounts, and more to do with the fact that having cash on hand is crucial if you lose your job. After all: if you have to rack up living expenses on a card, you’re doing it at 20% anyway. In a sense, every dollar you have in savings is 20 cents you won’t have to pay to a credit card company if you’re laid off.
That’s not to say you shouldn’t be paying more than the minimum even as you build an emergency fund, or that you shouldn’t go back to paying off the card full-bore as soon as you reach your emergency fund goal.
April 15th, 2009 at 21:37
I agree with her! When you have the choice (while Earth is in economic turmoil) to either pay off your credit card or put money is savings you should put it in savings because it is not uncommon to have your credit limits lowered when a card issuer feels like it. It would be horrible if you used your only/last $10,000 to pay off a credit card and then the next month you find out you lost your job and your credit card limit was lowered to $1,000 and you have nothing else to fall back on. I would rather have $10,000 in my bank acct and have to pay for interest payments on my card(s) but still know I can pay my mortgage a few more months while I try and get a job again.
I know from experience that credit issuers lower credit lines. I pay my balance off each month and my credit lines keep going lower and lower as the months go by.
May 1st, 2009 at 12:25
I think you all need to see the big picture. Many of my credit cards have been reduced to the balance leaving me no room to charge. A few were cancelled on an opt out program. I opted to pay 12.99 percent instead of keeping the card at the new rate of 24.99 percent!!! So Suze is correct. The hell with my creidt cards, keep the cash to pay my car and mortgage – and guess what maybe some bill will be passed that will stop credit card companies from raising rates and then we can get them paid off. If I have a choice of what to pay and what not – my credit cards are going to the bottom of the pile. I would rather save my ride to work and my home then give more money to these credit card companies.
August 9th, 2009 at 15:24
You said, ” The problem here is that the more you pay down your credit cards, the more available credit you will have. ”
The problem with that is even if you make all of your credit card payments on time, the credit card company can slash your credit limit so you’ll never see the available credit you were hoping for.
Suze’s advice here isn’t all that loopy. It makes sense to save one to three months expenses as an interim measure, then resume aggressively paying down the credit card.
It makes no sense to save an unrealistic eight months of expenses if you’re hemorrhaging money in the form of 33% credit card interest.