Credit Card vs. Emergency Fund (Your Advice)

Your Advice - help answer readers' questionsOne of the questions that is often sent to me is whether one should to pay down credit card debt or build an emergency fund first. As with most issues dealing with personal finances, a lot depends on your particular circumstances. One readers explains hers and is looking for advice:

I just read your post about credit card debt vs. emergency fund. I completely agree with the concept and appreciate your example. I like numbers and they really help make the point.

However, I’m not sure what I can do in my situation. I have three credit cards that are in a debt management program and are therefore closed and unusable (~9K @ 9.99%, ~3K @ 6.99% and $450 @ 6% – paying $350/month total) I have two other credit cards – one is a store credit card, which is useless for emergencies and the other only has a limit of $300 @ 27.99%!!! (I kept going over my limit). Obviously, I should pay off the $300 balance and stop using the card, but that surely isn’t enough for an emergency fund. Should I just put some money into savings then?

Given the circumstances of this reader, what advice would you recommend?

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7 Responses to Credit Card vs. Emergency Fund (Your Advice)

  1. Mike says:

    I can’t tell you what you should do, sorry. But I can tell you what I would do.

    I need to keep a roof over my family’s heads. I would build an emergency fund of a 2 or 3 mortgage payments before aggressively paying on credit cards. Why? Because if the income stops rolling in, it could take a few months to find a job. In the mean time, credit cards are not going to make my mortgage payments.

    Hope that helps give you some perspective. Cheers.

  2. Ann says:

    What I would do, If I were you…

    First, Pay off both the credit cards but each payment you make match with an emergency fund deposit.

    Second, Can those cards. (either in the freeze suggestion or literally cancel or trash)

    Third, get a better credit card: one with a greater limit, lower interest, and greater versitility. Start at zero and pay it off each month. Rebuild your credit.

    Lastly, Each credit card payment, match and add to your regular an emergency fund deposit. This will keep your credit card purchases reasonable for your income, because each dollar you spend is costing you two.

  3. Pat says:

    First things first. You need to get a handle of your spending habits (with a budget plan)and track where your money is going.

    Focus on paying on-time & the minimum payment every month.

    Follow up with building your emergency fund. Dedicate a certain percentage or dollar amount every pay period without religiously and without compromise.

    Start small and build your emergency fund to $500 to replace your need for a credit card. This emergency fund will provide you with the needed security that is needing for unexpected events.
    (Continue to contribute to your savings until you accumulate $1000 for added security).

    Good Luck & Good Fortune!

  4. JMBIndy says:

    Emergency fund first. $1000.00.

    Then deal with the debt.

    Recommended reading….

    Dave Ramsey, “Financial Peace” and “Total Money Makeover.”

    Good luck to you!

  5. greg says:

    The first step to take is to pay off that $300 on the credit card and then stop using it except in the case of an emergency.

    From there, you can begin to build up an emergency fund.

    Since it seems that you haven’t mastered how to use credit cards, I would go to an all cash system and not play with them until all that debt is paid off.

    I would also trash your store credit card (is it paid off?).

  6. Chrisfs says:

    Drop the store card unless you can buy groceries with it. The 3 month expenses rule is unproductive because it stops some people from even starting a fund. If the $300 is a windfall, Pay down $200 on the card and open an account with $100 (with INGdirect, or HSBC, etc), look at your budget and see if you can set up a monthly deposit to the account, even if it’s $10 or $25/mo

  7. I’d spend some time thinking about the spending habits that got you into this situation first and try to find a way to slow them down. Next, I would tackle the 9.99% card first. Then I would build a small emergency fund. Next, I would tackle the lower rate cards. Finally, I would build a real emergency fund of 3-6 mos. salary over time.

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