Suze Orman Tells Us To Pay ONLY The Minimum On Credit Cards. Wait, What?!

by Paul Michael on 9 April 2009 32 comments

You’re not seeing things. This is not an April Fool’s gag (although if I’d written this last year it would have been). No, this is Suze Orman’s latest advice and it is a complete 180 degrees from her usual advice. Why? Two words – the economy.

I did a double-take on this when I walked past the television a few days ago. My wife was watching Oprah and Suze is a regular guest on the show. I’m used to hearing the same advice from Suze so I thought I was hearing things when I heard her say “only pay the minimum.” I sat down and started watching, as the audience gasped and cheered.

The reason for this drastic turnaround is all based on the rotten economy and the credit crunch. And you may have already noticed a few “changes” to your credit cards recently. This, from Suze Orman:

"The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been about paying your bills on time. 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. Many of you are even finding that when you do finally pay off your credit card debt that the issuing credit card company of that card is closing that card down as fast as they can so you cannot ever charge on it again. You did everything right, and yet still you could have your credit limit reduced, which can have a negative impact on your credit score."

You can read the whole article here. In a nutshell, the credit card companies were more than happy to let us all borrow more than we could afford back in the good old days. But now that they’re hurting for money, they’re changing the rules on us. Even if you’ve been an ideal customer for them (carrying a high revolving balance and making only minimum payments) they could see you as a potential risk. And if you do everything in your power to pay off your card, that avenue of credit could still be closed to you. Not so good if you need a fallback in times of crisis.

It’s for this reason, and a few others, that Suze Orman is now telling all of us to be as selfish as the credit card companies are being; let them wait for their money, and instead channel every extra cent you can into your savings account to build up an eight-month emergency fund. That’s the amount of money you’ll need to survive for eight months without any other form of income. If the proverbial nastiness hits the fan, you can only count on yourself.

What’s more, debt can be renegotiated (a lesson we’re all learning right now). Interest rates and repayment terms can be renegotiated. Outstanding balances can be renegotiated. However, the contents of your savings account cannot. And in a credit crunch, the chances of accessing money that isn’t yours is a lot tougher.

So, despite what everyone has been telling you for eons, you need to consider paying only the minimum on your cards. Use whatever money you can get hold of to build up a big, fat emergency fund. Oh, and of course, don’t continue spending on those credit cards and buy only what you need. If you need to put it on a credit card, you can’t afford it. These are tough times, who knows what lies ahead. Be prepared and hope that you never have to use that cash you’ve been squirreling away.

9 Apr. 2009 | 11:29 AM Arvin

It still sounds like a highly dangerous proposition, making such a one-sided argument, but the way you put it actually gives it a decent point.

This is the first month I'm not going to be paying my entire credit card balance off fully, and only because my emergency fund has been almost entirely wiped out. It's a scary time but when I need to have cash in my checking account for things like rent and student loans that I can't pay for with my credit card, having that little breathing room on the other side of the credit equation is all that's keeping me from having to borrow money from my relatives, which is the second to last thing I'd want to do (the last thing I'd want to do is borrow money from my friends).

Be assured though that as soon as things level out I'm throwing everything back to killing that CC debt.

Meanwhile, I dunno about an 8-month emergency fund. I'd say 3 months or so is pretty good, at which point you can find a nice balance of savings and debt reduction that's right for you. In fact, with interest rates for savings so low, it might not be all that wise to put money in there instead of debt.

9 Apr. 2009 | 11:38 AM n

i watched this eppy, and breathed a huge sigh of relief. it's what i had been doing anyway. who has funds to throw it all to these cc companies? like suze said, they'll wait for their money. i'm happy to indulge them with that wait. 8 months of savings is hard to get to, but as long as i'm contributing to my account every paycheck, i'm satisfied. it all adds up.

9 Apr. 2009 | 11:53 AM Guest

...should be gold, for example? I'm curious because I'd like to make this a goal.

9 Apr. 2009 | 12:01 PM Guest

I have quite a stash built up! But I started years ago when I saw the writing on the wall and gold was $370/oz. Now it ranges between $800-$1,000/oz.

9 Apr. 2009 | 12:25 PM skywind

this might be a good idea. But if you're living beyond your means and your CC balance is growing every month, you should work on THAT problem. I don't want a huge EF and huge debt. Then you need a bigger EF, because part of if will have to go to service the debt if the worst happens and you need to tap it. That seems counterproductive to me.

9 Apr. 2009 | 12:32 PM StyckyWycket

There is something about this that I find very unsettling. While I think it's okay to focus on an emergency fund, "let[ting] them wait for their money" is playing with fire.

You have a hefty emergency fund, good for you. But how much of that are you going to spend paying off the accrued interest on your credit card balance after company raised your interest rate? It just doesn't seem very smart or penny-wise.

9 Apr. 2009 | 12:42 PM Guest

Won't keeping a balance on the cards affect your credit rating? It's not a terrible idea, but I'd have to consider all the ramifications.

9 Apr. 2009 | 1:32 PM Andrea Karim

Yes, I wonder about that, too. I obviously think that an emergency fund is important, but not paying down your credit cards doesn't ensure that they won't lower your limit anyway. Hm.

9 Apr. 2009 | 1:44 PM Anne Ferguson

It's all about striking a balance. Eight months EF for someone in financial distress is like telling them to climb Mt. Everest! Planning for periodic expenses (e.g., car insurance), setting aside money for "life happens" expenses are key steps to financial stability. Once that plan is in place, AND not incurring credit card debt, create a plan for methodical debt reduction. Suze has gone from one extreme to the other. I respect what she has done for so many in terms of awakening them to financial realities, but don't always agree with her advice.

9 Apr. 2009 | 2:04 PM Guest

Paying down the bare minimum each month may be an option for some but not others. My 0% balance transfer offer is set to expire in June so I want to pay my debt down as much as I can before then. Then again, I am fortunate enough to have an emergency fund topped up already.

9 Apr. 2009 | 3:42 PM Michelle

I don't think that paying only the minimum is "making them wait for their money." They will rake in the interest in the meantime. If they're going to mess up your credit for you anyway, why pay them at all?

10 Apr. 2009 | 2:36 AM Fred Lee

But better to avoid all this mess in the first place and curtail one's consumption. It's way to easy to just charge things, and all those little things that you gobble up at Walmart really add up, so buyers beware and leave the CCs at home.

10 Apr. 2009 | 5:04 AM Kevin

I have been a Certified Financial Planner (CFP) since 1993 and can say, without qualification, that Suze Orman is the last person I would ever recommend for financial advice.

She is NOT a financial advisor, but a self-promoting actress/author. She's in the business of selling her personal brand, which she has built up not by providing good advice, but through her personal charisma. Her advice is terrible, more often than not, and this is just one more example. Many, many people will be harmed by this and they won't have the recourse of arbitration or the ability to appeal to regulators for relief. But Suze will get the PR she wants (like she's receiving from this Lifehacker article), and that's all that matters to her.

If you can't afford to pay a professional financial advisor for personalized financial advice, then listen to Dave Ramsey (www.daveramsey.com) or buy one of his books. I don't agree with everything he says either -- but he's head and shoulders better than Suze Orman, or any other "talking head" financial advisor on the airwaves or in print. Take Dave's advice and get out of debt if you really want to improve your financial situation. Ignore Suze.

10 Apr. 2009 | 5:09 AM Kevin

This got me so riled up I forgot which blog I was reading.

26 Jun. 2009 | 6:02 AM Guest

I totally agree. Suze Orman is not a financial advisor in any sense of the term. Her life's work is writing and selling books. If you are intelligent enough to read your CC bill, you will quickly and easily see the interest rate and how much you are charged each month for carrying a balance and what a miniscule portion actually goes to principle if you make only the minimum payment. Stashing that 8 month savings will mean very little when you find yourself having to also pay a CC out of it. You cannot just pay your "usual bills" from the savings and ignore the CC companies. They will come after you and making your house and car payments will mean very little if the CC companies force you into bankruptcy and take away your home and cars. I have read a lot of things by Suze Orman and often wonder if "orman" isn't just a typo and it should read "moron."

10 Apr. 2009 | 5:38 AM Guest

for posting. I can't stand Suze Orman. I've tried to listen to her during PBS pledge drives, but she never made sense to me. It's good to hear that a professional in the field has the same outlook.

10 Apr. 2009 | 6:04 AM Holly

It is funny that all the "advisors" have changed their advice- everyone except Dave Ramsey. I see a lot of people on these financial blogs bad mouth Dave, but he lasts the long haul and his advice weathers the storms of our economy. Getting out of debt is always the best choice. I cannot understand why people depend on a line of credit from a company that shoots them in the foot as fast as they can. Depend on yourself working and saving to make it, and the less you owe makes being able to weather the storms easier. When you need more money get creative and work hard. It is not wise to walk around with the anchor of a credit card around your neck. She is walking in fear and reacting- until you don't have a job keep working to pay off your balance.

10 Apr. 2009 | 6:55 AM Linsey Knerl

I started following this discussion when Trent at The Simple Dollar brought it up. I would recommend his rebuttal to this way of thinking as a more balanced approach.

http://www.thesimpledollar.com/2009/04/07/is-suze-right-do-emergency-fun...

At the time, I was flabbergasted. While I don't follow everything that Dave Ramsy prescribes, I do agree that he has been even keyed with his advice (as well as others, like the late Larry Burkett.)

In order to get to the 8 months living expense emergency fund that Suzy suggests, a family living on $2,500 a month (conservative, perhaps) would need to put away $500 of their monthly $3,000 a month take home pay (assuming they HAVE that much to spare) for over 40 months! (That's a long time.)

How much interest will accure during that time? If they have only $5,000 in cc debt, making the minimum payments for 40 months will cost them a heck of a lot of interest ($1ks of dollars.) Interest that the credit card companies are hoping you will provide them with (even if they have to wait.)

The fact that most American families are struggling, they are not likely to be able to put away the amount needed to secure 8 months living expenses in the next 5-7 years anyway, and the reality credit card companies are giving Americans even more opportunities to charge up accounts and sit on high interest rates causes me to distrust this advice.

Everyone will need to find a balance that works for them, but this one-size-fits-all advice just doesn't cut it with me. I hope that anyone finding this advice to be burdensome will get a second (or third) opinion.

Thanks for bringing this up, Paul!

Linsey Knerl

10 Apr. 2009 | 7:33 AM Guest

People were cheering when she announced this - are you surprised? She's finally given people with credit card debt an excuse to *not* pay down their debt. According to her, they need to pad their emergency fund first - which is good advice, except that most people won't have the discipline to do this. They'll spend the money that would have been sent to the credit card companies, and fall further behind each month. It doesn't make them a bad person, it's just human nature.

Sorry, Suze. I don't buy it.

10 Apr. 2009 | 8:53 AM The Economist

I heard this same advice from Suze and it threw me for a loop. I understand her point of view, but I'm not sure it applies to my situation. For starters, I'm carrying about $8,000 in credit card debit from a wedding. Since the wedding we've been paying it down at about $1,500 a month. So it won't take long to get that gone. At the same time we have very little in savings. But it's been my approach to have a single focus. In this case it's paying off dept. Once that's done, in 5 months or so, it will be a single focus on savings. Sure there's a risk to this, but there's risk everywhere.

I do have to wonder though about Suze's advice, for one reason. Her argument is based on the fact that credit card companies are taking away people's line's of credit, which many depend on for backup if they don't have savings. While I currently fit that model at the moment, as far as relying on credit, it doesn't apply to me in the sense of credit available. Right now I have about $60k available in credit. My interest rate on most is below 10%, and just a month ago one raised my limit another $5k.

Granted, this could all change tomorrow, but I doubt it will all change in the next 6 months. I would much rather enter into uncertainty with no debt, than savings that was simply the same amount as my debt, all the while gaining negative interest.

On top of that, I agree with some of the other posts in here about the 8 months savings. It will take us years to achieve that goal, and it will be much faster and more effective to do that without a credit card balance eating away at my bottom line.

Either way you go, if you lose your job, you're on your way to Painsville. In the end, I guess it all depends on what kind of pain you're like the least.

10 Apr. 2009 | 9:17 AM David Nofsinger

I think that every financial problem needs it's own custom answer, but I would think that generally it would be best to pay down on credit cards. You are still paying interest, you are still using more of your credit limit than you have to. Besides, you have to keep in mind too, credit card companies have to retain a majority of their customers to stay in business.

If someone has 2 or 3 credit cards, maybe it's a time to pay a little on the principle of ALL of them. If you pay on several, and one of them gets closed on you, you shouldn't be slammed so hard.

10 Apr. 2009 | 9:38 AM Philip Brewer

Setting an 8-month target size for the emergency fund is an interesting choice--and probably a reasonable one for our current economic situation. I wrote a post a while back on figuring the size of your emergency fund which talked about why 3-6 months is the standard size and when you'd want to adjust it.

10 Apr. 2009 | 12:18 PM Guest

I think the problem everyone has with this is they apply it to themselves and it may not be applicable. A lot of credit card companies have overextended themselves are are lowering limits as people pay off cards to conserve cash. You also have to note that, some companies are using advanced algorithms based on spending habits to trigger higher interest rates and lower limits. So as soon as your your layed off and change your spending habits they change, your credit limits/interest rates change also.

Some people are carrying high debt loads and work at places considering layoffs. In this scenario its safer to save and pay the minimum till you know your secure. With the job market being so bleak there is a decent chance of a job search taking a year. To survive that, cash in hand is far more important then credit rating.

10 Apr. 2009 | 1:38 PM PJ

Unfortunately, the time to build an emergency fund of that size was a couple of years ago. As someone else noted, it takes a LONG time to do that. If you are afraid of losing your job, you don't have that much time. So while I agree that people should have more cash on hand and stop using credit cards as their EF, I hope people realize that they can't build one to weather this crisis, because they are looking at a process that will take a couple of years to do, assuming they can keep their job.

11 Apr. 2009 | 9:17 AM Archimedes Trajano

Too risky for me and for the most part it is just to spite the credit card companies. If it gets to the point of renegotiations and stuff with the card company, think of what that would do to your credit rating.

Then again, I usually just use my credit card to buy stuff that I can afford and get the cash back/etc benefits that the card offers. I rarely have a balance at the end of the month (and I say rarely because there are times I just forget to pay the bill)

Although you should still have some funds left over for emergency, I keep some funds for those, so paying it all off in full without any notion of an emergency fund is a bad idea too.

I set up an automatic savings account and deduct some funds every month which I don't bother looking at unless I do have a need (which has arisen a few times -- car, condo, emergency travel), I keep my main petty cash line in check.

I've been doing this since I started work as an RA at University, so it is pretty stable for the most part.

12 Apr. 2009 | 7:07 PM Guest

I have ALWAYS paid on time and Always more than minimum, as I was trying to get balances down. What happens, even though I was at 50% and ALWAYS paid on time, my remaining line was taken away and now they are increasing my interest rate. If I opt out, my account is closed and even though I have been diligent, my credit scores are DAMAGED, due to the banks changes and not mine. So at this point I have a I don't give a damn attitude. Why even bother??? Why not just declare a BK? I'll guarantee that your scores will improve faster.

13 Apr. 2009 | 12:07 PM pluto

if you pay only the minimun , the next month you will find high interest to pay . do u think is a good idea ??

14 Apr. 2009 | 1:34 AM Fitch

Don't pay off your credit card to save money for a layoff? Or avoid it getting canceled?

Someone need to graph this out. You'll have significantly less money in even a year from now if you follow this advice.

14 Apr. 2009 | 9:20 AM J.

Have the people cheering ever heard of universal default?

If you lose a job, it is very likely you will be late on one or more payments (medical bills, mortgage, etc.) If you are late on *any* of these payments, the credit card can and will jack your interest rate way up *immediately* (without giving you 30 days' notice). This is actually in the fine print of your contract.

So suddenly that balance you are carrying is drawing 25% or more in interest. Great. If you're only making minimum payments, your balance will snowball through the magic of compound interest. Meanwhile, you're socking the money you should be using to pay down that balance into a savings account, where it will be earning less than 1%. Do you see where this is going? Do I see bankruptcy in your future?

Yes, of course you should have a big emergency fund. But to rack up credit card debt to do it? Bad idea.

Sadly, there may come a time when you've exhausted all your funds and have no choice but to pay the minimum on cc just to eat. I hope this doesn't happen to you, and it certainly isn't a "strategy".

Suze is such bad news. Now all those Oprah viewers will be taking the part of her advice that they like: make minimum payments. But they will miss or ignore the big picture.

16 Apr. 2009 | 6:36 AM GTrant

This lady is just plain clueless. How can you advise people to stay in debt in case there is an emergency so you could pile on more debt? How can you tell people with a clear conscience to stuff money into a savings account earning 1% and keep debt at 10+%? And the idiots who are sitting in front of daytime television suck it up and go wild with it. Sheesh......

28 Sep. 2009 | 7:11 AM Mike Howard

I'm sorry to disagree but the only advice you should ever heed with a credit card is to pay off immediately, right now, don't delay just pay off whatever you can afford right now.
Credit cards are evil and when you have been in debt like I have (now thankfully out of debt) then you can see them for what they are.
Pay the minimum? Absolute rubbish.

30 Jan. 2010 | 6:27 PM Guest

Orman is a hack. I used to read her books and watch her show regularly, but I'm sick of listening to her tell people to walk away from debt! She continues to enable bad behavior and to blame it all on the bid bad banks. I hate the banks too, but it's time for people to take responsiblity for their actions!

Suze Orman Tells Us To Pay ONLY The Minimum On Credit Cards. Wait, What?!

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