That's the good problem one reader asked me about earlier this week:
I am sitting on a decent amount of cash right now. I have some consumer (credit card) debt but at very low interest rates, like 1.9% and the highest 7.9%. I also have one zero rate card that I am going to pay off. I also have a car loan with about $15K left at about 6%.
I have twice as much cash as consumer debt and theoretically I could pay it all off today but that would leave no cushion. I've lost about 15% in the market - so not so bad compared to a lot of folks. I had been putting aside money for a [home] down payment, but [my job] is talking layoffs. I don't think I'll be targeted…still I am cautious.
What would you do?
Well, since you asked: I wouldn't worry about the losses in the market that much, especially if the hits you've taken are in a retirement account and you're under age 40. You have time for those investments to come back from the grave.
As far as the cash, it's great that you have a lot of cash saved up (I wish I did!), but all that credit card debt isn't good. Take a glass-half-empty approach: on one hand, you have twice as much cash as you do debt. On the other, if you're laid, off you could wind up spending half your cash reserves on debt, leaving you with much less of a cushion than it looks like you have.
What I'd do is find a comfortable balance between paying off as much of the credit card debt as you can while keeping six months to a year of cash in case your job gets funky. If possible, pay off the highest-rate card completely, keeping in mind that credit card companies are under duress and are jacking up rates even on good customers these days.
Don't worry about the car note since as long as you're making regular payments and not falling behind, the lender can't jack up the rate. Lastly, start putting your feelers out about a new gig! If you're safe, that's good, but knowing your organization is shrinking should be motivation enough to see what else is out there, just in case.
Good luck.
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Score 1 for the consumer
Credit card crackdown OK’d
Posted: 04:10 PM ET
By Jessica Dickler
CNNMoney.com staff writer
NEW YORK (CNNMoney.com) — Cash-strapped consumers got some welcome news Thursday when regulators voted to rein in controversial credit card practices.
The Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration, all approved the regulation, which is expected to take effect by July 2010.
The rules prohibit banks from practices such as raising the interest rates on pre-existing credit card balances unless a payment is over 30 days late, and applying payments in a way that maximizes interest penalties. They also mark an end to double-cycle billing, which averages out the balance from two previous bills. That means that consumers who carry a balance will no longer get hit with retroactive interest on their previous month’s bill.
Consumers will also be given a reasonable amount of time to make payments, and payments will be applied to higher-rate balances first, to reduce interest penalties and fees. Credit card statements will clearly list the time of day that a payment is due, and any changes to accounts will be in bold or listed separately.
And, finally, no more universal defaults — a policy that allowed credit card issuers to increase the interest rate on one card if a customer missed a payment on another card.
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