One noted credit expert recently released a report regarding your credit score that goes against traditional wisdom. This report states that your most beneficial option is to pay the minimum amount that is due on your credit cards every month, and take the money that you were going to pay more than the minimum and drop it into a savings account. This savings account should only be utilized for emergencies that will almost inescapably come up.
There is some sound advice and wisdom in this advice. Most individuals, when presented with a fiscal emergency, do not have access to the financial resources to handle it. They wind up finding personal loans or borrowing from family members to take care of the emergency, or possibly getting a cash advance on several credit cards to accommodate of whatever emergency arose.
You should have ready access to an emergency fund since life almost guarantees that unexpected financial things are going to crop up occasionally. You must be realistic about what determines emergency also, since that would NOT include things like a 50 inch plasma TV going on sale, or a once-in-a-lifetime sale on the latest Coach handbags. Generally, an emergency would be unforeseen medical or hospital care expenses, or possibly you require some major fixes to your auto, perhaps your son or daughter’s tuition bill at college are due next week and they neglected to inform you, or a host of other possible things.
But there are many troubles with this method which render it as falling into the category of not being good advice, in spite of the normally sound advice of the reputable person who published the statement. Foremost, you need to look at the bigger credit picture. Based on the current typical interest rates on credit accounts, you are in all likelihood being assessed about 18% or even more in interest on your outstanding balance. If on a $3000 balance you just pay the minimums every month, it will require more than 17 years to pay off, and you will have paid more than twice the beginning balance in interest charges alone. And that statement presumes that you do not charge anything more to that account in the interim.
Now consider that you might in best case get as high as 3% interest on your emergency savings account, and it does not require anyone to be a rocket scientist to determine where you are paying out more money. From your credit score perspective, paying the minimum amount each month does indeed keep your credit score intact and your debt holders pacified, but at a tremendous expense to you.
The additional issue becomes one of discipline. Say you implement this strategy and over a number of months you have been able to save about $10k in your savings account for that emergency. Then while you are reading the Sunday newspaper, you learn that Office Max is starting a blowout sale on LCD TVs. In spite of your long lasting want to pick up one of those newest plasmas, do you possess adequate discipline to not dip into your emergency fund and picking up one of those plasma TVs? A majority of individuals would have to candidly say that the temptation to do this would be beyond their power to resist.
The best means to keep your credit score as high as possible is to at the least keep your current balance as low as approximately 20-25% of your account credit limit and to make your payments in a timely fashion each month. After you get to that point, THEN you might want to choose to implement this method for adding to an emergency account and it would still keep your credit score without costing you a mint in interest. Closing the account totally is not a good idea since then you do not have an ongoing history with that credit card, and keep in mind that your credit score is a number calculated from your credit history over time.
Carefully consider what actions you take that will impact your credit score since that is a dynamic number that you need to keep as high as possible all the time. Doing so will give you an advantage in many more ways than you probably even recognize.
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