Dip into emergency fund to clear credit card?

lb12345

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I enjoyed the show but found some of the advice a bit strange such as dipping into their emergency fund to pay off credit card debt. Also wouldn't necessarily agree with the 'snowball' method for paying off their debts, but I presume that was just to change their behaviour rather than the option which made the most financial sense (i.e. paying off the debt that costs you the most)
 

Brendan Burgess

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some of the advice a bit strange such as dipping into their emergency fund to pay off credit card debt.
It was clearly correct to use the emergency fund to clear the credit card debt.

Think of it like this. If you had no credit card debt and no emergency fund but a credit card limit of €14,000, would you take out €5,000 cash on your credit card so that you could have an emergency fund? I hope you wouldn't.

If you have a good limit on your credit card, then you don't need an emergency fund.

Brendan
 

RETIRED2017

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772
I enjoyed the show but found some of the advice a bit strange such as dipping into their emergency fund to pay off credit card debt. Also wouldn't necessarily agree with the 'snowball' method for paying off their debts, but I presume that was just to change their behaviour rather than the option which made the most financial sense (i.e. paying off the debt that costs you the most)
With secure jobs your emergency fund is not an Issue if you have debt with high interest rates,

If you have secure employment and are saving a credit card can be used in an once off type of situation instead of a emergency fund earning little or no interest at present,

They had an emergency fund and at the same time were not paying off there credit card so they were paying interest on interest and a emergency fund lying idle while the piled on more debt ,

the presenter should have got them to pay off any debt not resulting from purchases out of there emergency fund first,
 
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Laughahalla

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.[/QUOTE]
I enjoyed the show but found some of the advice a bit strange such as dipping into their emergency fund to pay off credit card debt. Also wouldn't necessarily agree with the 'snowball' method for paying off their debts, but I presume that was just to change their behaviour rather than the option which made the most financial sense (i.e. paying off the debt that costs you the most)
It is always good advice to pay off credit card debt.
Best advice I've heard is as follows - It works
Steps
1) Save 1000 euro - Just to cover little emergencies such as car repair/washing machine kaput so as not to use credit card or overdraft.
2) Pay off debts smallest to largest as quick as possible (debt snowball)
3) Save 3-6 months expenses ( Mortgage, light, heat, food, basics to keep your house and family fed)
Steps
4,5&6 can be done at the same time
Save towards childrens education , Put 15% of household income into pension , pay off mortgage
7 Increase wealth and net worth by investing
 
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lb12345

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It was clearly correct to use the emergency fund to clear the credit card debt.

Think of it like this. If you had no credit card debt and no emergency fund but a credit card limit of €14,000, would you take out €5,000 cash on your credit card so that you could have an emergency fund? I hope you wouldn't.

If you have a good limit on your credit card, then you don't need an emergency fund.

Brendan
That's fair enough and a good point. Personally I'd feel really uncomfortable not having an emergency fund (especially with two young kids). I'd completely understand the logic if that was their only credit card debt and it was holding them back, but they still have so much other debt to pay off. There was also no mention of any plan to build the emergency fund back up again after the holiday
 

Cervelo

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The other thing to remember is that CC debt is expensive debt compared to all the other debt you might have
 

RETIRED2017

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That's fair enough and a good point. Personally I'd feel really uncomfortable not having an emergency fund (especially with two young kids). I'd completely understand the logic if that was their only credit card debt and it was holding them back, but they still have so much other debt to pay off. There was also no mention of any plan to build the emergency fund back up again after the holiday
If you do not pay off your credit card you are paying interest on interest if your are in secure employment like they were and you are rolling over your debt, If I remember correctly the presenter pointed out if they /you had a debt of 3500 euro stopped using there Credit Card and paid the required amount required by Credit Card Company it would take them 9 years to clear it and would have paid more than 3650 euro in interest ,

If you have steady income each month and you have high Interest Debt like Credit Cards rolling over ongoing month after month, you might think you have a emergency fund but do you really?
 
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Buddyboy

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That's fair enough and a good point. Personally I'd feel really uncomfortable not having an emergency fund (especially with two young kids). I'd completely understand the logic if that was their only credit card debt and it was holding them back, but they still have so much other debt to pay off.
Another way of looking at it is that if you have an emergency fund of , say, €5000 (earning nothing in interest), and you have credit card debt that is more than that, then you are paying the credit card company to keep the emergency money.

For example, if the credit card interest rate is 16% (typical AIB rate), then the €5000 is costing €67 per month (ignoring compounding). so every month you hold onto the €5000 "emergency fund" you are paying an extra €67 to do so. That's €800 a year!

A different approach would be to pay the €5000 into the credit card, saving you €67 a month, then if you need emergency funds, use the credit card. Every month you do not need the emergency fund, you are saving €67. If you don't need any emergency funds for the year, you are €800 less poor.
 

SBarrett

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I enjoyed the show but found some of the advice a bit strange such as dipping into their emergency fund to pay off credit card debt. Also wouldn't necessarily agree with the 'snowball' method for paying off their debts, but I presume that was just to change their behaviour rather than the option which made the most financial sense (i.e. paying off the debt that costs you the most)
A lot of it is physiological. If you have a lot of debts, being fully clear of one of them will give you a boost. And you can go at the next one, with the repayments of the first debt and then the second. Conversely, if the first debt you tackle is too big, you may only save a few months of a loan that is being repaid over a number of years. It's not as satisfying to know you will have the debt paid off in 4.5 years instead of 5.


Steven
www.bluewaterfp.ie
 

Allpartied

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It was clearly correct to use the emergency fund to clear the credit card debt.

Think of it like this. If you had no credit card debt and no emergency fund but a credit card limit of €14,000, would you take out €5,000 cash on your credit card so that you could have an emergency fund? I hope you wouldn't.

If you have a good limit on your credit card, then you don't need an emergency fund.

Brendan
Isn't there a risk that, in an emergency, the credit card may not be available, as the bank might withdraw your availability to credit.

The nature of an emergency is that it is not predictable.

So, if a person loses their job suddenly, or has an accident, or for whatever reason their regular income disappears for a time, it is useful to have a few months worth of salary to pay for essentials.
The most important payment is the mortgage or rent, as it keeps a roof over your head.
The credit card is an unsecured loan, so even though it might effect your credit worthiness, or your ability to access credit in the future if you don't pay it, the consequences are not as terrible as losing your home.

I know this might be unlikely for most people, but there are occasions when not paying the Credit Card bill makes sense, even when you have cash in a savings account.

Though, obviously, in the RTE programme it was the right thing to do for that couple.
 

Allpartied

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I have not heard of a credit card company reducing a limit because someone has lost their job.

Brendan

Really, I thought it was common practice. If your credit score changes, and having no income will change it, then they reduce the amount you can access. It's common sense really.
Credit card companies can, and do, change credit limits without warning, which might seem a bit harsh. Although the explanation for no warning is that it would stop people going balubas on the card prior to the change, so, again probably makes sense.

https://www.theguardian.com/money/2009/feb/08/credit-cards-credit-rating

This article references UK practice, but I can't imagine it's much different over here.
 

RedOnion

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If your credit score changes, and having no income will change it
No, having no income has no impact on credit score here. Only defaulting on repayment does.
Yes, banks can withdraw the credit facility on either a credit card or overdraft, but in practice they only do in specific circumstances.

And the linked article - apart from being UK based, you might notice it's from March 2009.... A bit of a cleanup at the height of the crisis doesn't make something common practice.
 

Bronte

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How would they know you lost your job? We didn't tell the bank or the credit card that my husband lost his job.
 

Allpartied

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No, having no income has no impact on credit score here. Only defaulting on repayment does.
Yes, banks can withdraw the credit facility on either a credit card or overdraft, but in practice they only do in specific circumstances.

And the linked article - apart from being UK based, you might notice it's from March 2009.... A bit of a cleanup at the height of the crisis doesn't make something common practice.
Thanks for that, seems a little risky to continue to give large credit volumes to people with no income, but that's the modern banking system.

However, the fact remains, your credit limit can be withdrawn, at any time, by the bank. There is no control over that, they don't need any excuse, and there is no guarantee that another economic crisis won't hit in the near future. If there is another downturn, it would lead to large job losses and financial institutions would be "cleaning up" their credit risks. The emergency fund is real cash and the individual has total control over the fund. A bird in the hand, so to speak.

If someone has an emergency fund, say 5000 euros and they have a credit card bill of 5000 euros then there may be circumstances when it is beneficial to pay off the credit card bill. The two teachers in the programme were right to do this, as they have secure employment, and other savings in the credit union.

I'm just saying that people in more precarious employment, on contract, or self employed might be more vulnerable if they used their emergency fund to pay off the credit card bill.

They could be faced with no job, no income, a drastically reduced credit limit and no way to pay the mortgage, or rent. It might be better to manage the credit card bill more conservatively, paying off over a longer period, in case an emergency happens. It will be more expensive, but could be viewed as an insurance policy for themselves.
 
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