Should You Pay Off Your Credit Card Right Now or Save? – Episode 357

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[00:01] Hello, prosperity listeners. Today, we’re going to be talking about what you should do when you have credit card bills and we’re in this unbelievable time. You should be hanging onto your cash, paying your credit cards, or other bills. Kim, we would love to get your insights. Oh, thank you, Spencer. I’m glad to take this listener question, which we just love so much. And my very specific answer is hold on to your cash. So it’s very tempting at a time like this when maybe you get a little extra check, maybe it’s a government check, maybe it’s a check from your employer, maybe your own good business got you a bonus or you’re in an environment in your business where you got some extra cash because you’re

[00:40] doing extra things for people and you want to hold on to it. This is not a time to be overly focused on paying off debt because even if you have a credit limit, so let’s say your credit limit is $20,000 and you have a high interest rate on it, which could be, I would say 12% and up would be my definition of a high interest rate. And you have, say, $19,000 of debt on that $20,000 available credit card. And if you get $5,000 and you reduce your balance from $19,000 to $14,000, there is a chance that the bank could lower your credit limit to $14,000. In fact, they did that during the last, what was it, the 2008 recession that we went through? Yes. Yes. So not only did they take away people’s home equity lines of credits,

[01:40] they took away credit card lines of credits. And so just like anything, there is a big, big difference in what happens to you as a capable human being with an economy, your own personal economy, when you pay off debt versus what happens to you as a capable human being with your own personal economy when you save the money. And saving the money, and save as a verb, as in like putting it away, and we’ll talk about where real quick, is more important right now than paying off debt. Because paying off debt, while it does essentially have the same impact from a net worth standpoint, that you as a capable human being standpoint is not the same. And so you want to have as much capability as possible.

[02:32] And frankly, right now, any extra cash, if you don’t already own a whole life, or you could put it in as a paid addition, I would just have you keep extra cash in the bank, or ideally, a local credit union, maybe a medium sized bank, potentially even at home. There are definitely times when just keeping some cash at home is a wise thing. And now is potentially one of those times because we may have issues where you can’t get to the bank, like right now in our town, you’re not really supposed to be driving down the street. And maybe you want to have some dollars to go to the grocery store or something like that. Never mind the question of how you get to the grocery store if you can’t drive down

[03:14] the street. Nevertheless, cash in your own hands is a valuable item right now. Totally agree. In fact, there are some areas where they’re actually limiting how much you can withdraw from an ATM. Absolutely. And I think we’re going to see more of that as this economic challenge comes now behind the medical challenge that we’re already having. And so again, control and thinking from a prosperous mindset, which is being prepared and not being fearful, whatever preparation is to you. And if that’s more cash in your home, awesome. If it’s bottles of water, awesome. I just read a really fun story this weekend that is a bunch of kids that were with a country that had challenges. I’m trying to shorten the story quickly. And they actually got more value from the water

[04:14] and bottles of Gatorade that they were carrying than anything else because literally you can go numerous days without food, but you cannot go numerous days without water or something to drink. And so the most valuable item was not the gold coins that they had, was not even the food that they had. It was the water and the Gatorade that they had. Interesting. Wow. So I want to really dig into some of this credit card stuff with you, because we’ve had some listener questions. And so I’m going to play a little bit of contrarian. Does that work? Yes. Perfect. Okay. So now you mentioned in your definition of a high interest is 12% more or less. At what point would you say it makes sense for someone to be paying off that credit

[05:07] card instead of hanging onto cash? Well, I think when we get a little more confidence about our economy’s ability to move forward again, which it’s just stuck right now, and that’s okay. It’s something that we’re all going through. And it was really the same in a way. So as soon as economy started moving again, the worldwide economy and then the US economy, possibly even your local economy, then without a doubt, we want to be very focused on getting credit card paid off. But I don’t believe we want to be 100% focused on getting credit cards paid off. And I know many people have credit card interest rates that are in the 18s, 22s, even 24 or higher percent. And so if you’re in that situation, then you absolutely want to be putting extra cash once we get our economy

[05:55] moving again, which I’m hoping, you know, maybe two, three months down the road, but it could be longer than that. We’ll just see. Yet you don’t want to put every extra dollar against debt. I would split it 50-50 and put 50% of your extra dollars against debt and the other 50% into, again, just a savings account at a credit union or a smaller local bank where you can get at it and be confident of it. And of course, make sure it’s under 250,000. But typically if we’re talking about somebody that has credit card debt, I doubt the $250,000 limit is an issue because you want to be building up savings so that you don’t have to go back to the credit cards when other emergencies occur. And it doesn’t matter how awesome and responsible and capable you are as a human

[06:43] being. There’s going to be things that crop up that are not your normal expense. It could be tires on a car. It could be air conditioning on a home. A variety of different things occur that you could call emergencies. You don’t need to take that as an extreme term. It’s just things, a nature that need money now that we really weren’t prepared for. And so we want to build savings so that we are able to handle those emergencies. As playing the role of contrarian right now, one of the challenges that you have as a personal user is as you use more credit within your limit. So let’s say you’ve got a balance of the $50,000 on a card. You’re using 25,000. Your ratios are off. So as you do that, that can impact your credit score. I think it’s like a medium impact.

[07:32] So would now be the time to get a new card and do balance transfers or now be the time to follow other strategies? What do you suggest so we don’t affect credit scores? Yes, that’s a good question. So just so people are aware, the ideal amount of credit that you use is about 30%, which seems a little odd to me. Like, why are you giving me a credit limit in your example of $50,000? And I’m only to use 30% of that, not even 50%, which was your example at 25,000. So if you have the ability to get another credit card and spread that out, yes, I think that would be valuable. The whole issue of credit scores are very interesting to me because in 08 and 09, there were loans that were available to people that

[08:20] had not ideal credit scores. So credit scores go probably the lowest I’ve ever seen. And I’m not an expert in this area to a large degree, but I do pay attention. So the lowest I’ve seen are maybe 200 or 300 points up to, is it 800 or 850 is the top? I think it’s 850 is the top. Okay. So you’ve got this range and maybe you’ve seen lower, but 200, call it 850. A quote, bad credit score might be 600 or it might be 550, which is not horrible. It’s just below the sort of magical 720, depending on who you talk to or 700 or sometimes even 680. That seems to be the realm of the amount of a credit score that is the crossover line. Would you agree somewhere in that 680 to 720 range? Yeah, I think 720 is the new and in the business world, we want to see higher than that too.

[09:17] It’s definitely true when you add in element of businesses and business credit and they’re going to be a little pickier there for sure. What I noticed in 08 though, was that people with scores in the high 600s were still able to get critical loans. I would consider a car loan a critical loan because must have a car in most cases to go to work. Of course, that could be changing too. You could use Uber, you could work from home, etc. We know that there are solutions to those things and yet I think just anytime you can have a higher credit score, you have more flexibility. While not something to be overly focused on, if it’s as easy as getting another card and shifting some balance, that’s good. Then of course, also there’s the

[10:00] 0% interest rate game that you can play by switching balances to different cards. You do want to be careful. Sometimes there’s a pretty hefty cost to that like there was a one-time fee or some other term that they might use that when you run the math is essentially the same as them charging you an interest rate on your balance for a while. I don’t know that it’s something that we want to rely on. Nevertheless, if it’s something that you can take advantage of right now and maybe get yourself an extra couple months of runway, if you will, that’s an absolutely valuable thing to do. If that provides a little peace of mind, that’s even more valuable because then you can be thinking more clearly about your situation without the pressure of, oh my gosh, today this is due or that is due or

[10:50] my interest rate is going to go up or what have you. I think what you’re mentioning is there’s two sides to this. You have what looks good on a balance sheet. You like your financial balance sheet, but then you also have your emotional balance sheet. Then going over to the credit card back in 08, it felt very much like it was grading on a curve, like the mean average. Even though I think a lot of the credit scores did go down as general. For us here on the Prosperity Podcast, what we’re trying to do is realize now is an unbelievable time and then prepare people for what may happen in the future. Doing things, preparation now is going to put you so much further ahead in the future. So your insights here of just holding onto cash, extremely valuable.

[11:36] Are there any other final takeaways that we should note for listeners? Well, I think if anybody wanted to add a spiritual element to the discussion, which is going to be a bit of a stretch, but I’ll throw it out there for those that want to add that and maybe feel ready to uplevel that aspect of their lives. And that is to inspirationalize, or if you will, spiritualize the concept of money to begin with. Just understand that it’s basically just ideas. It’s so tempting to look at a bank account and see limitation. Yet, if you can just uplevel that a tad, and we understand that ideas are constantly moving and sharing with each other, trading, then that can get you the substance in your life that you might be looking for where you had previously looked to money

[12:36] for that substance. That is a challenge that I’m going to take as well. How fun. Thanks. Well, listeners, thank you for spending time with us today. If you’re not already subscribed to the podcast, make sure you do that because every single week we put out a new episode that’s going to help you become more prosperous in your thinking and in your finances. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.