Skip to main content

Suze Orman is changing her tune - and we don't really love the new song.

The lyrics go something like this: Instead of erasing the balance on your credit card in one swift blow, put down the minimum payment and stash the rest of your cash in an emergency savings account.

The financial guru's advice hits some sour notes. An emergency fund to help you keep your head above water for three to six months is tough to build. And when the interest you're paid to keep your money in that savings account pales in comparison to the rate you're charged for keeping an outstanding balance on your credit card, the advice becomes tough to swallow, too.

With 74 million cards circulating among Canadians (that's three for everyone over the age of 18) and the average interest rate falling between 17.5 and 19.9 per cent, it's no wonder consumer credit card debt in this country has risen nearly 40 per cent since 2004, according to a recent report by Deloitte & Touche.

It's time to start dealing with your debt - before it gets any worse.

While using your hard-earned savings to pay off your card feels painful, consider the alternative. If you owe $2,500 on a credit card charging 19-per-cent interest annually and you make minimum monthly payments covering 2.5 per cent of the balance, it'll take you 21 years to eradicate your debt and you'll end up paying the creditor over $3,800 in interest - more than the amount you initially borrowed Besides, do you really want to be paying for a vacation two decades after you take it?

Lowering your interest rate even a fraction will make a big difference to your bottom line. To see how your plastic stacks up, visit bankrate.ca (click the card icon at the top of the page), where you can compare the interest rates, annual fees and billing cycles for dozens of bank-issued cards. If you find a card with a significantly lower rate than your own, consider doing a balance transfer. Or use your newfound financial knowledge as leverage with your bank. A simple call to discuss your options could save you thousands in credit fees.

But there's another gap in Ms. Orman's guidance. When making the minimum monthly payment on your card becomes your main concern, you turn your back on your credit score. This three-digit rating is your golden ticket to low interest rates. A higher score means creditors view you as low risk - and the less interest you'll pay. A good score is 720 and up.

While credit type, account duration and payment history all factor in, 30 per cent of your credit score is measured by the amount you owe on each of your accounts. If your cards are maxed out and you're only making minimum payments, you're hurting your score. By keeping your balance at 35 per cent or less than the total credit available to you, your rating stays healthy.

To Ms. Orman's credit, it's not unimportant to have an emergency fund. In fact, it's necessary. But your first priority should be paying off your credit card debt.

After that's done you can start building your savings. And no, that doesn't mean having to sew your own buttons and grow your own veggies (but if you do, good for you). Instead, consider your big expenses, as well as what we like to call "hidden money" - extra cash you can free up without drastically changing your lifestyle.

For example, doubling your deductible - the amount of money you must pay toward claims before your insurer will cover for you - from $500 to $1,000 will translate into a 15- to 20-per-cent savings on your premium.

If your homeowner and auto insurance policies come from the same company, combining the two could potentially save you up to 30 per cent on your premium.

Taking advantage of the current (excellent) rates and refinancing your mortgage will free up some low-interest cash.

And getting rid of your ride will mean less green at the pump and higher savings (not to mention the environment). The Smart Cookies have tried every trick in the book to free up finances, some easy (losing the gym membership), some hard (axe the cable).

Once you have your emergency money set aside, keep it tucked away for a rainy day in a high-interest savings account.

And be realistic about what defines an emergency. Your roof springs a leak - emergency. A designer shoe sale - not so much.

Angela Self will be writing for Globeinvestor.com weekly. She is one of the founders of the Smart Cookies, a group of five women who specialize in personal finance. They are hosts of a self-titled show on the W Network and the authors of The Smart Cookies' Guide to Making More Dough. Find out more about them at

Interact with The Globe