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Comment by pavel_lishin | Hacker News Reader

Does having a credit card count?

What if someone has a $5k debt on a credit card, and only $1k in savings? Should they prioritize getting more cash into a low-interest savings account, while racking up interest on the CC?

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this is how i typically recommend people to prioritize their money:

(1) pay your bills (2) get a small emergency fund together (enough to pay for a small emergency, car breakdown, 1 month's living expenses, etc) (3) pay down high interest debt (credit cards, etc) (4) get a large emergency fund together (enough to support you for a few months if you lose your job, major emergency, etc) (5) invest and pay down low interest debt (mortgages, student loans, etc).

creating a smaller emergency fund to start sets the best precedent because it creates a safety buffer. what happens if you throw tons of cash at paying down your CC bill every month and save nothing, but then you lose your job and have 0 income? you're going to end up missing payments, get penalized, and your debt will snowball again quickly. you need to have something to fall back on when bad things happen, just in case.

This is exactly how I've been doing it. Auto-transfer set up on the bank account, and taking cash out for spending money instead of just letting myself use a credit or debit card.

credit cards are useful tools. i use mine and just pay it down monthly. if you have any plans on obtaining a loan/mortgage at any point in time, the easiest way to establish yourself with good credit is through actually using a credit card.

Everybody says this, but I've obtained three different mortgages in my lifetime and never had a credit card. In lieu of credit history, the bank has just asked for other evidence that I pay my bills, like statements from the utility company.

Maybe I'm just lucky, but in my opinion, wanting a good credit score is a pretty bad reason to get a credit card.

how long ago were the mortgages and how old were you when you tried to obtain them?

i think the climate is different now. i have a friend who is reasonably fresh out of school and tried to buy a place, but got turned down for mortgages due to lack of credit history (and presumably a lack of "other evidence" as well).

First one was in 2002 and I was 20. Last one was about 21 months ago.

I've heard that a lot of rules have changed as well, but I don't know how much changed after I got the last one. Some changes definitely affected me at that time, but the hassle in my case was related to the fact that I was buying another house before selling the current one so I need to hold two mortgages simultaneously. Required more documentation of cash in the bank due to debt/income ratio.

Ironically, once around 2007 while trying to take advantage of a 10% off deal from a home improvement store on a big purchase, I got turned down for their line of credit due to lack of history. (Glad it happened that way in retrospect.) But mortgage companies have never given me trouble.

Maybe I'm lucky. (I'm not independently wealthy.) Mortgage companies are inscrutable. :)

I don't mean that I don't use it all. I just don't use it for every single thing, every day. I was doing that, and was paying it off timely. But I found my spending was higher then I'd care for.

That is bad advice. Always always get out of debt first.

CC debt is highly liquid. If you're fucked, you can max it out within 24hrs. Ergo, it doesn't make sense to have a pool of savings around and service the debt interest payments when you could clear out the debt and put that interest payment to good use elsewhere.

I'd extend that emergency fund to more than a "few" months worth as soon as possible.

If you lose your job, it may take quite a few months to find a new one.

agreed, this is just a back-of-the-napkin beginner's advice.

Unless you are carrying low/no interest debt you should really pay it off rather than put money into savings.

As long as your bank is not evil and keeps dropping your credit limit as your balance decreases you can always borrow again against that line of credit if needed.

I disagree.

Saving money for an emergency should be a priority over paying off a credit card debt. In an emergency, you cannot count on the credit card bank keeping your account open. You cannot count on them maintaining your current credit line. ALL banks are "evil" in the sense that they operate with their best interests at heart, and no matter how horrible of a position it may put you in, the CC bank has no obligation to maintain your current credit line.

Having a $2000 emergency fund, even if it's in a shoe box under the bed, is more important and more VALUABLE than $2000 worth of open credit on a credit card. The $2000 under the mattress is almost entirely under your control. The $2000 in open credit is almost entirely OUT of your control.

If you're in a real emergency, what would your rather rely on?

The only thing people should be aware of in this situation is that $2000 under your bed actually cost you $4000 or whatever since you are holding a balance on your credit card with high interest.

But the alternative, having a $2000 expense and no cash, would be a emergency. You can pay off $4000 in debt (and that doubling is probably hyperbole, but whatever), If you can handle small emergencies that will come up. Read Chapter 6 of Dave Ramsey's "Total Money Makeover" for a more thorough analysis.

"If you're in a real emergency, what would your rather rely on?"

I think the point was that if you have credit card debt then you are in a emergency situation already. So using money to pay off that debt means you can get 'out' of the emergency. Paying off the debt and then putting $2,000 into a liquid account allows you to declare the emergency over.

The trick that folks often don't quite realize is that when you carry debt, some of your 'income' (whether its a paycheck or money back from recycling aluminum cans) goes to servicing that debt and not to your benefit. If you are living at the edge of your means, any money not going to supporting you directly is wasted.

That's the reasoning that says "priority #1" should be "get out of debt." #2 is build a "cushion" so that when unanticipated expenses hit you don't take a long term hit to the income stream, #3 is invest in longer term income growth (could be night classes, could be a washing machine to save on laundromat bills, could be stocks and bonds).

I understand that minimum monthly payments and interest only payments are absolutely wasted and provide you with no benefit.

However, the emergency I'm referencing is not a general "my finances are a disaster" emergency. I'm talking about an emergency that has an impact far beyond your immediate financial situation.

I'm talking about "I cannot afford food" or "I cannot afford transportation to a job interview" type of emergency. That's a real emergency, in my opinion.

"I'm talking about 'I cannot afford food' or 'I cannot afford transportation to a job interview' type of emergency. That's a real emergency, in my opinion."

I think we're in strong agreement. I was thinking of your two examples as being subcomponents of the base emergency "We're living beyond our means." Once you are in an emergency situation, your safety systems are compromised and additional emergencies become much more likely.

I currently don't have U$ 2.000 (not an American, but having money for a rainy day should be worldwide), but I could raise them with a (high interest) loan in about 30 minutes.

The article says they don't count, though:

"29.5% said they would have to resort to credit cards, a home equity line of credit, reverse mortgage or unsecured loan. "

I hate to break it to you but you're living beyond your means. A high interest loan is not an emergency fund. Ideally you should have enough money to live for 6-12 months if your income stopped tomorrow.

I know when I was younger I didn't have such things, but then the recession of 2002 hit and I found out really quickly how much it sucks trying to make a house payment with an unemployment check.

I know I am, but one of the niceties of a socialist system is that if I get fired, I get paid my salary for a year and a half in unemployment :) , plus three months' salary straight away.

I actually wish I was fired :) (though the black mark in the CV here is really bad). The really bad thing about this system is that it's based on seniority, if I switch jobs, I lose all those perks (start back at zero, only get some minor unemployment after 3 months on the job)

I'm also neither a homeowner nor a parent, and could scale back my spending to zero pretty quickly (moving in with my grandfather and selling my car). Not a long term strategy, obviously, and I am thinking of becoming a parent (in 2-3 years) which will force me to be way more conservative with money.

No. If they have $1k in savings, they should continue working on the credit card. However, if they have under 300 dollars of savings (scraping the bottom of the checking account), making it to $1000 should be the first priority.

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