23

I'm unemployed and on a tight budget with 6 months of savings. Should I pay off my credit cards to avoid monthly payments even if it reduces half of my savings? Is there a risk of the bank reducing my credit limits after payment?

  • 11
    How many months worth of bare-minimum living expenses does your savings cover? – Hart CO Jan 19 '18 at 19:59
  • 3
    What are the interest rates and at what sort of risk level is your savings? – quid Jan 19 '18 at 23:18
  • 38
    All the existing answers ignore the more fundamental question: if while you had a job there was enough money in savings to easily pay off your cards... why were you carrying balances and thus making exorbitant interest payments, instead of building up your savings? – RonJohn Jan 20 '18 at 6:35
  • 7
    "I have 6-7 months of savings." That's fantastic and all, but... why didn't you pay off your debt while you still had a job? – RonJohn Jan 20 '18 at 23:25
  • 11
    "I was only making ~$270 per month after expenses." No, you had $270 left over after expenses. This still doesn't say why you didn't pay off your debt while you were still employed. – RonJohn Jan 21 '18 at 1:41
45

Should I pay off my credit cards to avoid monthly payments even if it reduces half of my savings?

Unless you can still live for quite a while with that half of your savings and no income, then no. Do not use the cards any more, make the minimum payments, live on a shoestring budget, and save cash like mad. Once you get back on your feet, use the cash you've saved to pay off the cards completely.

Is there a risk of the bank reducing my credit limits after payment?

Not because you're unemployed, no. They would only lower your limits if they feel that there's a risk that you will max out your current accounts and not be able to pay them based on your credit reports. Since income and employment status do not appear on credit reports, that would not be a reason for them to lower your limits. So long as you keep making payments on time and don't extend your credit any farther, there's no risk of lowering your limits.

However, credit limit is not your problem. You need to get some income so that you do not risk missing payments and destroying your credit. Paying the minimums (and the interest, which is the big problem) is only a temporary situation to keep you from becoming illiquid (out of cash).

  • 18
    Pardon my ignorance, but if he spends X dollars to pay off his credit cards now and later finds he no longer has enough savings, what's to stop him from then proceeding to charge X dollars over time to his credit cards? – Hurkyl Jan 20 '18 at 13:06
  • 8
    @Hurkyl what's to stop him is that many things can't be paid (or are difficult / expensive to pay) using a credit card. Living expenses being the big one, other installment loans like a car loan being the other major ones. You need cash for those; cash advance limits are a fraction of purchase limits, they have insanely high interest rates, no grace period, and often get paid last if he has to use the card for purchases later. – briantist Jan 20 '18 at 19:09
  • 6
    This seems like risky advice to hand out given you don't know the interest rate. An APR approaching 30% is not atypical in the UK for mature cards. Paying off high interest loans immediately, or transferring them to low interest loans if you can get one, might make more sense if the unemployment is long. If nothing else, the money paid off could be re-borrowed from the card balance at a later date. The card interest is almost certainly powers higher than the savings account. – Oli Jan 21 '18 at 10:37
  • @briantist Some cards let you take cash advances from them, transferring available credit into cash balance in your savings account. This is now cash for things you need cash for (with the caveat that interest starts accruing immediately rather than 21 days later). – IronSean Jan 24 '18 at 14:32
25

Dave Ramsey, the famous personal-finance guru and radio personality, has a concept he developed after counseling thousands of families in crisis situations called the four-walls. The idea is to prioritize your money to take care of your immediate, physical needs. This would include your savings.

  • First, you pay for food
  • Next, you pay utilities
  • Next, you take care of shelter
  • Next, you take care of transportation.
  • lastly, you buy necessary clothing. Most people, however, have adequate clothing.

If these needs are met, then and ONLY then would you worry about credit cards. It would be silly to lose one's home but have the Mastercard current.

If you pay off your cards, you may not be able to meet other needs.

Edit: If the amount of savings is large enough that paying off the cards still leaves more than enough money to pay living expenses for the most pessimistic time frame you could be of off work, then pay them off.

Also, in the exact order you would pay the immediate living expenses depends upon where you live and specific circumstances. If you own a home in the USA, it could take up to a year to foreclose. The idea is to pay the most time critical living expense first. I assuming the poster's savings are sufficient to cover living expenses and minimums on the card.

  • 8
    This is indeed what Ramsey says, but beware that shelter should come first, in some countries. It's routine for the weather in my parts to drop below -35C (-30F), so you'll die much faster without shelter than you will without food. – ChrisInEdmonton Jan 20 '18 at 13:21
  • 6
    Utilities meaning water, sewer, electricity, and garbage? Wouldn't you need the shelter before that? – user62427 Jan 20 '18 at 18:25
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    In most places, nonpayment of rent will be tolerated much longer than unpaid utilities. The idea is to pay all those things. – Andrew Neely Jan 20 '18 at 18:29
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    There are quite a few places where non-payment of rent will get you in trouble in 20 days or so where utilities do not get shut off unless you are more than half-a-year or even far more behind in payment. You switch the two bullets according to your local jurisdiction. – Bent Jan 20 '18 at 19:37
  • 2
    @Bent however there are places where you can not pay your rent and the owner can not throw you away until you find another accomodation (which you can't because you have no money) while banks can skin you alive... – Danubian Sailor Jan 20 '18 at 22:06
17

No.

By paying off your credit cards now, you'll be losing money you won't be recouping in the foreseeable future.

I imagine the second part of your question is related to being able to use the unused credit to pay for living expenses. While it is unlikely they would reduce your credit limit after payment, that's the problem with being beholden to someone else for your spending money-- credit is someone else's money, and theirs to do with at their will. I personally have had (not credit card) limits reduced without warning based on a drop in my credit score. Check the terms of your cards to find out whether they reserved the same right.

Make the monthly payments. Here's hoping otherwise, but if everything absolutely goes to hell for you in the next few months, your remaining credit card debt can always be discharged through bankruptcy. But once they're paid off and you find yourself without money to pay the rent/mortgage, there's no way for you to get that money back.

You're insolvent, or will be soon. Admit it, put yourself first and tell your debtors to get in line. You need the money more than they do. There's nothing noble in prioritizing repayment of debt over your continued survival.

  • 6
    This answer is fine assuming a pretty low level of savings. If, for example, OP's savings are 8-months of living expenses then I don't think this approach makes as much sense. We don't know the level of urgency because we don't know the level of savings. – Hart CO Jan 19 '18 at 20:37
  • 3
    @HartCO It doesn't matter, because neither he nor we know how long he will be unemployed or what unexpected expenses may come up. Suppose he has 8 months of living expenses in savings and so he uses 4 months worth to pay off the credit cards. Then it takes 5 months to get another job. Given the uncertainty, what is the advantage of paying off the debts now? – Jay Jan 19 '18 at 22:38
  • 3
    What if I have 48 months of savings, still applicable? No, at some point it becomes bad advice. I think it's a good answer, just not universally applicable. Also, people can know roughly how long their job search will take based on demand, nothing is certain, but with several months time most people can make the necessary changes to avoid destitution. – Hart CO Jan 19 '18 at 22:48
  • 2
    It doesn't matter how many months of savings he has put away. That money is all he's going to get to sustain him for the indefinite future, and it will take even longer to replenish (better hope that recession isn't coming, because he may be drawing from it again in short order!) What's "good" or "bad" is subjective, but it makes no financial sense to give away half of his current worth for an optional cause that doesn't contribute to his survival and can be dismissed entirely in BK court if need be. – Ivan Jan 19 '18 at 23:39
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    This answer completly ignores the fact, that there are interests on credit debt. Very high interests. If the OP won't find a job in reasonable time, that credit might grow to the extend he won't ever be able to pay it off. And no, don't assume that personal bancrupcy is an universal instrument. It is not. Some countries have it, many have not. – Danubian Sailor Jan 20 '18 at 22:08
6

Others have mentioned this in comments, but I think it is worth having in an answer: the answer to this question depends on your situation.

If your level of savings is relatively low compared to your monthly expenses, the advice in D Stanley's answer and Ivan's answer is good because you may need the liquidity to pay your bills. I'm guessing that they're probably right, since you probably wouldn't have already been carrying a balance on credit cards if you had a large amount of savings.

However, if you do have a relatively large amount of savings (say, you have a year's worth of savings and you expect to be employed again within a month or two,) it might make more sense to pay off the credit cards because of their high interest rates. Aside from the payday loan shark joints, credit cards have some of the highest interest rates, often 20% or more of the remaining balance every year. There's really never a good time to be paying such high interest rates, but when you have no income is a particularly bad one.

In any case, you should try to find work as quickly as possible and reduce your spending to the bare minimum needed until you're back in a stable financial position. Ideally this would be after you've not only acquired a new job, but also paid off your credit card debt.

  • 2
    I agree but wanted to mention that you may be out of work longer than you think, so plan for that. Also if you are depending on someone, don't assume that will continue forever--for instance if you are living with someone and not paying rent, you may have to pay rent yourself before you start work again. Ditto insurance, phone and other bills. Basically plan enough money for the worst case then use any left-over money to pay off your cards. – Bill K Jan 19 '18 at 23:32
  • @BillK Agreed. That's why my example situation was if you had 6-12x what you're likely to need during the period of unemployment. – reirab Jan 19 '18 at 23:42
6

Pay off all your credit. Only start using credit again when you see that next month you won't be able to make ends meet. This will preserve most money, cash-flow and credit. Any other answers are... Just wrong.

  • 3
    "Pay off all your credit." "This will preserve most money, cash-flow and credit." That's mathematically wrong, since you'll be wiping out a big chunk of your savings, and that's the opposite of preserving money and cash-flow. – RonJohn Jan 20 '18 at 6:28
  • 5
    @RonJohn Cash, credit and savings all belong to the same class of assets, liquid assets. They are equivalent in all that matters here. This man's earnings are interest on savings. His expenses are numerous, but among them are interest on credit in use. He should immediately move assets from savings to credit in use and turn it into credit again. He does not lose any liquid assets on this, he just improves his cash flow position – Stian Yttervik Jan 20 '18 at 8:45
  • 2
    You are assuming this person's available credit doesn't change. There's a very real possibility that the extended credit would be reduced, however. – ChrisInEdmonton Jan 20 '18 at 13:23
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    It's the only reasonable answer. All others advise the OP to get into debt spirale, which might be impossible to get out of. – Danubian Sailor Jan 20 '18 at 22:00
  • 3
    @StianYttervik Credit is NOT your liquid asset. It is somebody else's (the bank's) liquid asset. For you, it is only a tool for convenience and/or temporary financial leverage. Further, it is a tool that can rapidly put you in enough debt to cancel out your actual liquid assets. If you've screwed up and put yourself in a credit hole you can't readily climb out of, then paying off the whole balance all at once only reduces your other available assets and increases the likelihood that you cannot access any cash at all when you need it. – Craig Jan 21 '18 at 21:53
5

Pay of your credit cards. You run them up later again, if you run out of cash and have no other way of getting a loan.

Simple math: let's assume you owe $5000 at 18% interest rate. That's 75$ of interest a monthly The measly principle in the minimum payment will hardly make a dent into this.

Let's also assume you have 10k in cash and have a minimum burn rate of $1000/month. If you don't pay them off you need 1000 + minimum payment (maybe $90) so you will last roughly 9 months and still owe 5000.

If you pay it off now, you run out of cash after 5 months, since you only pay 1000/month. At the end of 5 month you just start paying with your credit card. This will last you longer because you pay a lot less interest. Probably close to 10 month.

  • 2
    You cannot assume that you can run the balances up again if you find yourself desperate for money. Banks can and do close credit card accounts for a variety of reasons, including your credit score dropping, not using the card (if you're not using it, they aren't making any money in fees or interest), the bank is dropping that particular card (sometimes they'll sell accounts to another issuer, sometimes they'll just close the cards), and more. They can close the account whether there is a balance on the account or not. – Craig Jan 21 '18 at 22:02
  • @Craig sure the worst case scenario gets worse, but would you not agree that the expected scenario for the asker improves if he would pay off his debt? Or even only pays of 90% of his debt to discourage the bank from closing the account? – Dennis Jaheruddin Jan 22 '18 at 14:10
  • 2
    @DennisJaheruddin if the OP is making payments consistently, the bank probably will not close the account, and it us guaranteed that the OP will have that money in savings under his control, functionality the same as having it available on the credit account. If the OP pays off most of the balance, then the bank could close the account or reduce the credit line, making the money unavailable. Remember that we’re dealing with uncertainty (unemployment) and managing risk relative to the uncertainty. When a new job is secured, repayment of the debt can easily be accelerated without risk. – Craig Jan 22 '18 at 15:50
  • @Craig you seem to ignore the possibility that the person may just run out of money before finding a new job due to the interest payments, whilst they could have made it by paying off the card and then using it when it seems to become neccesary. As such it is not like 1 scenario holds all the risk, both choices have risks, just different ones. – Dennis Jaheruddin Jan 22 '18 at 16:24
  • 1
    The interest payments are incremental, and the minimum payment is a fixed, budgetable value, and having that exhaust your savings is a predictable future event. If you’re unemployed so long that the interest payments on your credit card exhaust your savings, your problems run deeper than an internet Q&A forum can help with. In a very practical sense, on the other hand, if you pay the card off with your savings, then the bank closes the account, and you can’t access money to pay rent or utilities, then you’re screwed much sooner. Screwed now is screwed now. – Craig Jan 22 '18 at 16:31
2

Until you get a new job, you need cash (savings) and credit. I recommend that you continue making the minimum monthly payments on your credit cards, so you keep the cash and you keep your credit intact. Let's say you have 6,000 savings and 3,000 debt on a credit card with a 5,000 limit. You run out of money after spending 6,000 savings and another 2,000 debt, that is 8,000. If you pay off your credit card, you have 3,000 savings to spend - and the bank might figure out that you are out of work and cancel your credit line, and you are stuck.

In the UK, you often pay different interest rates depending on how much you repay, so make the payments giving you the best interest rate.

Don't spend any money you don't absolutely need to spend. Same in the first few months of your new job until your savings are back where they were, and if you didn't feel it was too much hardship, continue and using the money to repay your credit card debt.

0

Like most of the other answers here, it depends. But if you spend half your savings paying off your credit cards, then live off the other half while you look for another job, you could run out of money.

If you just pay the minimum payment on each credit card, then that would leave you a more generous cushion to tide you over. At this point, it's not about saving interest charges, but having enough to live on.

But in some cases you could pay off the card, and if you run out of liquid cash you could start charging your living expenses or get a cash advance. Just don't put yourself in a position where you would have to pass another credit check before getting money out again. Just don't skip any minimum payments; that would dry up your credit real quick.

I guess it comes down to how confident you are that you could find another job before running out of ready cash.

-1

It depends on the interest rate on your card. If it is high (say, 28%), you should pay it off immediately. In fact, you should have done that a long time ago. There's no point in having savings at 0.5% interest and carrying debt at 28%, or even 12%. In your current precarious situation, you definitely don't want to waste precious cash on high interest payments.

From now on, you use your card for all purchases, and save your cash for payments that can't be made by credit card. Of course, you make your minimum payments on time; but they will be low since you're not carrying a large balance. Plus, you get the benefit of the grace period. Since you are still using your card, the bank has no reason to suspect anything is wrong. When your cash balance gets dangerously low, try to avoid using cash for anything other than making your minimum payment. For example, you could probably not pay your rent for a while, without any consequences. Or you might find a way to pay your rent from your credit card, e.g. via PayPal.

In your current situation, your credit score is the least of your concerns. Obviously you will not be buying a house anytime soon. Plus it's not clear whether paying off your card will lower your score at all, as long as you keep using the card and make payments on time. In any case, it will only affect future loans, if at all.

This approach will give you the longest possible time to find a new job without running out of money. The only disadvantage is the risk that the bank might cancel your card for random reasons, in which case you would be better off holding on to the cash you owe them. But in the current economic climate, that seems extremely unlikely.

  • "There's no point in having savings at 0.5% interest and carrying debt at 28%, or even 12%." Please read the highly upvoted answers already posted to this question, which give reasons as to why this statement is not always true. If a theoretical person has $100 to either buy food for the month or to pay down credit cards, then paying down credit cards could mean they would starve, if the financing company pulled the person's credit after payment is received. Other similar comments in this answer make its value suspect. – Grade 'Eh' Bacon Jan 22 '18 at 15:13

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