I’m always intrigued by advice that goes against conventional wisdom. That’s not to say that I’ll necessarily follow or advocate using such advice, but considering alternative points of view can either strengthen your conviction in your current course of action or open up superior alternatives. The specifics of one’s situation can also lead to a solution that wouldn’t necessarily benefit the majority of people.
I recently picked up a few personal finance books at my library’s annual book sale. For a dollar a bagful, I grabbed any that looked even slightly interesting. One of the books was an older title, How to Get What You Want In Life With the Money You Already Have by Carol Keeffe. The non-conventional advice was that you should pay the minimum on your credit cards.
It took some restraint to continue reading after seeing that advice in print, but following the author’s logic there may be cases where that is an appropriate course of action. Her basic premise was that people who pay as much as they can towards eliminating debt aren’t prepared (with savings) for emergencies and don’t have enough money to cover essential expenses with cash on hand. As a result, they end up having to pay for such things on credit, repeating the cycle month after month. By paying the minimum on credit cards, people would theoretically have more cash available for necessities and be less reliant on credit.
This method could work as long as you actually save your extra money that would have been used to pay down debt or use it to avoid purchasing necessary items on credit. Where it breaks down is when you increase your debt or spend the extra money on unnecessary purchases.
It should also be noted that the book was written when credit interest rates were lower and CD and saving account interest rates were significantly higher. The author tries to dispel the “myth” that paying the minimum will take forever to pay off credit card debt by saying that minimum payments will eliminate debt in a few years. She also made it seem as though parking the money in an account earning 10% or more was trivially easy. Unfortunately, neither of those arguments are applicable today. With the rates common on credit cards today, paying the minimum can take nearly 30 years to eliminate debt. Even the best online savings accounts offer less than 2% APY today. You can’t fault the author for her advice being less applicable today, but earning 1% in savings while your debt compounds at 20%+ makes her approach less advantageous today. This is particularly true of the advice that you should continue paying the minimum indefinitely, even when your emergency fund is sufficiently funded.
For someone who could avoid using their credit card completely going forward by covering all expenses with the money they didn’t use to eliminate debt, paying the minimum could be advantageous. Again, interest rates and personal situation could alter the effectiveness of such an approach. More than anything, what I took from the book was that all assumptions should continuosly be challenged and re-evaluated to ensure they still hold true.
While I can’t imagine ever paying less than the entire balance on my credit card, in some situations paying the minimum could be a good idea, if it allowed you to eliminate all need for credit going forward.
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December 24th, 2010 at 9:03 pm
Wow, the logic there just doesn’t make sense. I should pay 20% on my credit card so I can put money in a 1% savings account for “emergencies.” Couldn’t I just pay down my credit card, and then have credit available for “emergencies” and not pay the interest in the mean time?
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