I think most people put emergency fund at the top of the financial goals list so that they don't end up in a situation where they have to put an unexpected large expense on a high interest credit card. If you've already got the CC debt, you're already paying that interest, so getting rid of the debt should be a higher priority.
I'm also going to agree with those saying it isn't necessary to carry any balance on the credit card. You should be using the card, but you can pay it off every month and still have a great credit score.
First, call your credit card to increase your max. Then your Debt/Credit ratio will drop, and you credit score will increase. Then, I'd make it a goal to have 1k in the bank at all times, so pay off $500. Then with every paycheck, pay off the remaining balance as long as you have 1k left over. Credit cards usually have 17-20% interest, so its a terrible debt to own.
Don't carry a balance if you are paying interest on it. That to me is very stupid, unless you are somehow investing your money in something that is giving you a greater return, but lets be real here, most of the time credit card interest is in the 13-20% range, so I doubt you are getting a greater return. I am 30, but at the age of 27 I bought my first home, and my wife and I had great credit which gave us favorable terms on our loan. We both have credit cards that we use for rewards and we pay off balances monthly. We never let any balance stay long since we don't want to pay any interest. Now if your scenario means that you have a 0% interest credit card for 12-18 months (typical time range), then by all means, feel free to keep the balance and just off an equal portion monthly. It's always better to have liquid cash available in case of an emergency. That's probably what helped my credit, I usually like making larger purchases at retail stores and taking them up on their 0% credit cards and I just make equal payments every month until the balance is paid off. I always rather have money that I can move around if I need to. If push comes to shove, I'll just pay off any of my remaining balances, but that's usually not necessary. We all have unique situations, so just do what's best for you, but I definitely would never recommend anyone to carry a balance on an amount you are paying interest. Why the hell do that? Go get you a 0% interest card if you are adamant that you think carrying a balance gives you a good credit score.
On average I'd agree... And I don't personally carry a balance month to months. But what if... Some decision models that uses your highest revolving balance (ability to take on a big unsercurtised loan) interacting with your credit score (ability to not charge off on it) as a variable. Might not move the needle much, but could impact borderline credit bands. FICO score is not the end all be all of credit. Many national lenders have models that slices and dices all credit attributes (hypothesize indicators, see which ones are statistically significant, and use then). That's why a great FICO with very little history behind it might not get you the best rate, there's not enough information to make a educated decision.
I'm sure its already been said, but charge only what you can afford to pay off monthly. Use a credit card that gives you the rewards you want. If you can't pay your balance off monthly, you shouldn't be using a credit card to begin with. Paying high interest on credit cards and car loans should never be an option for anyone.
As far as the answer to the question, I would keep $1,000 in a savings account and use it as a baby emergency fund, then throw the rest at my debt. I would throw everything humanly possible at my debt and pay if off as soon as possible while keeping the baby emergency fund. Then and only then would I build my real emergency fund (6 months of expenses). We cut up our credit cards and paid off all of our debt (besides the house) last year and never looked back. Personally, I don't really give a rip what my credit score is because I never plan on borrowing money again. Should have the house paid off in the next 7-8 years, so we'll never even need a mortgage at that point.
This is what my wife and I are doing these last few months of the year. Put off saving money for a bit to eliminate all our credit card debt and auto debt so we can buy our second home without any other payments holding us back.
I understand your apprehension with credit cards because if you're not disciplined you can easily get yourself back into major debt. However, they do provide several benefits and protection you otherwise would not have with just cash or debit card. Alot of them provide extended warranties, travel discounts, rental insurance, etc. Also, it's a lot easier to recover your funds if your credit card is compromised as opposed to your debit card. And you should care about your credit score. You may not need a mortgage, but what if you need a new car? New roof? Your credit score determines your interest rates on these loans. I suppose if you have the cash for big emergencies it's not a big deal. Anyway, I wouldn't suggest giving up on using them entirely. They do have their perks.
Here's the specific breakdown of credit use. It uses limit vs balance... and it's highly impactful on your score .... Excellent 0-10% Good 11-30% Average 31-60% Below avg 61-100% I believe the "keep a (small) balance theory" is mostly to prevent your card from being terminated. Some lenders think if you're not using it, you will never use it. Lowes is a good example of this. They've already cancelled two credit cards of mine due to inactivity. Regardless, the biggest key to good credit is, living below your means .
Eh...I can live without those 'benefits'. Extended warranties don't matter to me and I can get travel discounts without a credit card. And the chances of me wrecking a rental car are slim to none, since I only rent cars once every few years. And oddly enough, my debit card has been compromised twice in the past year and both times the bank refunded my money the same day. The last time it was literally within the hour. (Thanks Chase!) Like you said, a 20K emergency fund should take care of just about any kind of emergency that comes your way without having to go back into debt. That's the whole point of having one. You'd be surprised how fast you can save up 20K when you don't have any payments.
Absolutely not. A credit card is ready cash. If you need a rainy-day fund, the $2k in credit card capacity can be part of that if you're not carrying a balance. Also part of that rainy day fund will be all the cash you didn't pay in interest to the credit card company. No way is an emergency fund more important than eliminating credit card debt. The only reason I would withhold cash is for a working capital buffer so that the normal volatility of your balance doesn't put you in the red before the next payday. You can add to savings after that.
US banks are notorious for their delay in security. Often by the time its rolled out, the new standard is full of compromises and scams. Yes, Chase and Capital One have great fraud protection and detection. Ive heard too many stories about Wells Fargo customers getting hassled about fraud. Debit cards are just a bad thing to use for everyday practice if it can be helped. Capital Ones fraud detection is fantastic. Any type of transaction that is suspicious is instantly text to me giving me the option to decline or approve. Ive had four of these types of transactions requesting approval and 3 of them were fraudulent. A simple response back "DECLINE", the transaction is immediately removed form my account, the card is canceled and the process to mail me a new card is all automatic w/out any further interaction on my part. I also really like how capital one is now putting the NFC chips in their cards. Now I dont have ot put my card inside the gas station outdoor card readers that are always being compromised with card skimmers.
These two posts are basically a perfect summary of credit card use. In terms of rainy-day fund, keep open credit - if you need your rainy day fund, you can charge things on your card and/or take cash-advances at that point instead of paying interest on debt now for no reason. Beyond that, charging everything you can - IF you are good with money and pay it off each month - is far, far better than just paying for it by debit card. There are a ton of advantages and no disadvantages.
I get that ima comes from the Dave Ramsey school, but if he is good with cash it does sound silly to not charge everything on the credit card instead of the debit card. A budget is a budget and if you can stick to it, why the hell not charge everything on the credit card and pay it off at the end of the month. A Chase unlimited freedom would be the perfect card for him. I get it if you suck at controlling yourself and you cant stick to a budget, then yeah a rewards CC isn't for you, but if you are paying everything off then why not get a little extra cash from a rewards card plus get the benefits they offer even if you don't use them.
I used to be irresponsible with credit cards too. But once I wiped away all my debt I learned how they can be a useful tool for spending. You can get 1-5% return on charges. Returns shoot up tremendously if you know how to use miles and points for traveling. Using a debit to make purchases is very risky and throwing money away basically, imo. Yes, banks do return your money eventually if your account is compromised. But I'd rather have the "cash" from my credit card stolen then the actual cash from my bank account.
If I had $1500 on CC and $1500 in savings I would pay what I feel like I can afford to pay. Not knowing income and reoccurring expenses its hard to say what that would be.
My wife and I have several cards but we never keep any balance on them. We pay any balance right away. Our credit history is excellent. If I were OP, I would pay off the credit card right away if I have funds available. Why pay unnecessary interest?
My wife paid off her credit cards and had a couple canceled. Her credit score was reduced by about 50 pts for some of the reasons outlined by others. This drop lasted about six months or so. For that reason I've maintained a small balance on our credit cards and feel that the minimal amount of interest charged from month to month is simply a cost of doing business. Our credit is also good and was in the neighborhood of 780s-ish last loan we took out (for a new truck about a year ago). Everyone has different ways of handling their own finances, I don't think there's an absolute right or wrong way of going about it. ymmv, as they say
