Put Emergency Fund Ahead of Credit Cards?

For years, personal finance gurus have said that the most important thing you can do is pay down your high interest credit card debt. In fact, most personal finance conventional wisdom has revolved around the idea of putting together a small emergency fund ($1,000 or so) and then tackling credit card debt aggressively. But now the personal finance world is abuzz with the advice Suze Orman gave on Oprah: Save up money before you pay off your credit cards — especially if you think you will lose your job.

Wait to pay off your credit cards

This is a major departure from the regular advice given. It’s a reaction to the recession and the spiraling unemployment rate. Suze Orman points out that if you are concerned about your job, your first priority is to build up your savings so that you have something to fall back on. The other reason to wait on your credit cards? To avoid having credit card companies close your accounts.

Dave over at My Two Dollars delves into the credit score aspect of Orman’s advice in great detail. He pointed out that many companies are closing credit card accounts that have reached a balance of $0 and that are inactive. This means that you can have your credit score dinged by having less available credit. And it also means something else: Folks who thought that their credit cards could serve as a supplemental emergency fund during the recession are in for a rude awakening if their credit accounts are closed by companies who aren’t interested in how responsible they are.

It’s an intriguing thought. And it makes some sense during the recession. In uncertain economic times, the general move is toward safety. And safety means building up your emergency fund and preparing yourself for the worst. Of course, personal finance is still personal, so there are allowances for differences in situation. If you have steady and reliable cash flow that isn’t in immediate danger, three to six months is probably still sufficient, you should be paying off those credit cards. But if your cash flow is on shaky footing, it’s time to prioritize your bills into something that probably looks similar to this, before things get really bad:

1. Housing (especially if you have a mortgage).
2. Food
3. Utilities
4. Emergency fund: building up to six to eight months of expenses.
5. Credit cards/other debt reduction.
6. Wants.

What do you think? Does this recession call for a suspension of the commonly accepted rules for paying off credit cards?

image source: U.S. government via Wikipedia