Suze Orman and the New Rules of Credit Card Debt

Personal finance gurus usually treat credit card debt as the plague and urge consumers to pay it off—ASAP. But this week, Queen of Personal Finance Suze Orman announced on The Oprah Winfrey Show that the old advice is wrong. The recession has made job loss so prevalent, she says, that consumers now need to make creating an emergency fund with eight months worth of expenses their top priority.

"If you have an unpaid credit card balance not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can," Orman said on the program.

Telling her fans not to prioritize paying off credit card debt is quite a shocker since her focus has long been about getting out of debt. In her latest book, 2009 Action Plan: Keeping Your Money Safe & Sound, she dedicates an entire chapter on the subject. But Orman says that now, with the number of unemployed Americans rising, having an emergency savings fund is even more important than being debt-free. "The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been in paying your bills on time," she said, referring to the fact that credit card companies have been lowering credit limits, increasing interest rates, and revoking credit cards altogether.

That means that many Americans could find themselves without any access to credit following a job loss, when they need it most. If someone finds themselves out of work and without a credit card, then Orman worries about her ability to put food on the table. That is why an emergency fund is key, she says. So instead of prioritizing paying of debt, Orman says that all spare dough—after making the minimum payments—should go into an emergency savings fund. Ideally, she says, that fund should contain eight months worth of living expenses.

While this approach makes sense for those living with little or no savings, consumers who already have a significant emergency fund should still focus on paying off credit card debt. That's something Orman, along with other financial experts, really emphasize. For those with rainy day funds large enough to last eight months, these more familiar rules still apply:

Pay attention to credit limits. Since card companies have been lowering credit limits to reduce their own exposure to default risk, Bill Hardekopf, chief executive of LowCards.com, recommends first checking the credit limit on each card. If you go over that limit, you will be charged an "over the limit" fee of around $30 per month, so paying off cards that are getting close to their limits can be more important than paying off the highest-interest rate card. Even getting near credit limits can increase interest payments.

Pay off the highest-interest rate card first. The next step is to direct any extra cash toward the card with the highest interest rate, while making the minimum payments on the others. As soon as the first card is paid off, start on the next one. That way, you can minimize the amount of money you're paying on interest. BankRate.com also offers calculators that can tell you, based on your balance and interest payments, how long it will take to pay off the card and how much you will have doled out in interest.

Ask for a lower interest rate. The recession has made such negotiations more difficult, but not impossible, says Emily Peters, personal finance expert for Credit.com. "We used to always tell people to call and at least try to get them to lower your rates, but now, people are calling the company and that's triggering a rate increase," she says. Here's what can happen: The call leads to a review of your credit file, and if there are any red flags, such as late payments, you could end up with a higher interest rate. "Now I tell people to call only if there are no red flags and you know you have excellent credit," says Peters.