1. Business & Finance

Should I Pay Off Credit Card Debt Before Starting An Emergency Fund?

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Credit Card Debt and Emergency Fund

Should you pay off your credit card debt or start an emergency fund?

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No.  Perhaps that was too direct, but I guess I have made my posture on this point clear.  I have heard many a debate from personal finance gurus and I have a strong opinion on why I believe you should have some emergency savings set aside even if you are in debt.

Debt problems are usually more than money problems, they are behavior problems.  Like many things in life our habits, both good and bad will drive our behavior and ultimately our results.  Using credit cards to pay for things can become a habit; a bad habit. 

The advantage of starting an emergency fund, even if you are in debt, is largely psychological.  Having some money set aside offers some emotional relief and provides another powerful side benefit, the ability to break the cycle of debt.  One of the first pieces of advice I offer someone who is in debt is to stop getting further into debt.  It seems like common sense, but I have heard countless stories of people who are trying to dig themselves out of debt only to find they are a major car repair away from credit card purgatory.  If you have no money set aside for the inevitable bump in the road, you will have no choice but to go into debt to pay for the unexpected or even expected expense that arises.

Aside from breaking the debt cycle, there are also sound financial reasons to have at least something set aside in an emergency fund.  If you are in debt, it is possible that the banks may lower your credit line or even close your accounts.  Read your card agreement. Somewhere in the fine print (which is the whole agreement) it will state that the lender has the right to do this.  If you had no money set aside and you no longer had access to credit, then when an emergency came along, you would really have a crisis on your hands.

If you are in debt, my suggestion would be to accumulate at least $1,000 or so as a cushion.  More money certainly would not hurt, but if you are starting from scratch, this is a good initial target.  Once you have accumulated $1,000, then you should focus all of your efforts on getting out of credit card debt.

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