Answering your credit questions - #4 - Suze Orman said to pay yourself before you pay your credit card payment - is this a wise thing to do?

Question #4:

I heard Suze Orman (American Financial Guru) say on her show that viewers in financial trouble should pay themselves first before they even pay their credit card payments, even if it means their score will dramatically decline. Is this a wise thing to do?

Answer:

First, Suze is an American Financial Guru. One must realize that the Canadian and American banking and financial system is almost night and day in most respects. They've been hit much harder in the US with their banking system and since they have very little regulation down there, many financial institutions operate like the wild west.

According to a statistic I heard on CNBC's On The Money, a few months ago, over 62% of American credit card holders had their credit card limits reduced (forced upon them) or closed entirely by the issuer. Thus, I can see where Suze would make such a recommendation. If someone was facing financial difficulties and paid their credit card diligently but had no savings for themselves, and then the issuer, out of the blue, cancelled their credit card (demanding full payment), it might be prudent to have some emergency cash savings. After all, survival at that point would be more important than worrying about a credit score that could later be fixed.

However, in Canada, we're not facing the same dilemma as our neighbours to the south. Sure, credit's a bit tighter here as it is globally, but we're on solid footing. Actually, the IMF (International Monetary Fund) has ranked Canada as the strongest banking system in the world. I've also spoken to the Canadian Banker's Association and the banks and credit card companies and they tell me it's business as usual - that they haven't suspended or closed credit card accounts due to the recession.

But a point of interest that one must be aware of, is that even if the credit card companies in Canada are not following what the US counterparts are doing, they are legally allowed to, should they choose to do so. A credit card works like a demand loan - the operative word being "demand" and demanded by your bank or the issuer. If you read the fine print when you signed up for your card, the company technically can demand payment in full at any time.

So having a solid slush fund of 3 -6 months savings is always a prudent suggestion. However, in our country, I would not recommend missing any credit card payments to throw it into a savings account as our system is pretty solid. Furthermore, one missed credit card payment can haunt your credit report for years and pulls your score down dramatically. Plus, if you're paying double digit interest rates on your card, it wouldn't make sense to throw it into a savings account paying a dismal rate of return.

If you'd like to read Suze's fully story on the issue, visit this link http://www.suzeorman.com/igsbase/igstemplate.cfm?SRC=SP&SRCN=suzescoop&GnavID=1&SnavID=134&NewsID=183

Be cautious when listening to media reports about the economy, banking and finance as the US system is dramatically different from ours.