Suze: Here is my advice. I'm having a little bit change on this for everybody, so listen carefully. Because as the unemployment rate really hit us hard in the last few days, if you think you're going to lose your job or if you're like a consultant like Barbara and God forbid something were to happen and you're down and you're not getting income, you need a stash of cash to live on because the credit card companies now, in their infinite wisdom, and I don't believe this is the wisest thing they could be doing, they are revoking credit cards, reducing credit limits, increasing interest rates to 32 percent, increasing the minimum amount paid from 2 percent to 5 percent. They are making it almost impossible for you to go to your credit cards as an emergency. You know, in my books prior to this I would always say, "Hey, you know, keep your credit cards open with nothing on it and if, God forbid, you get into an emergency, we can get money from a credit card." Well, guess what. You may not be able to do that anymore.
Suze: So since you can't do that anymore, you need a stash of cash. So if you are afraid that you're going to lose your job or are in a situation like you, I would make it a bigger priority to create an eight-month emergency fund and pay the minimum here because if something happens to your credit cards, oh, we'll figure that out.
Suze: You need money to live on. On the other hand, if you're really secure in your job, you know everything's fine, and you are paying 32 percent interest rates on those cards and—and things like that, then you have to make it the number one priority to get out of credit card debt. But only if your job is secure.
Suze: I hope that's clear to all of you.
Barbara: Yes, it is.
Suze: There you go.
Barbara: I've got another question.
Oprah: Go ahead, Barbara.
Barbara: If you have a car loan where your interest rate is higher than your credit card rates, should you pay the car loan down first? And the other question is, on these different type of loans, like a credit card or a car loan, do they represent different things on your FICO score? Are they looked at more favorably, a car loan than a credit card, so you'd keep the car loan open and pay down the credit card?
Suze: What FICO looks at, and in a few minutes here we'll actually show you the mix of how a FICO score is actually looked at here, but they will look at that you have all different kinds of credit. They want to see that you can handle a monthly payment on credit cards as well as a fixed payment such as a car loan or a home loan, so they look at all of it, and that accounts for approximately 10 to 15 percent of your FICO score. Not that big of a deal. The real parts of your FICO score, the main things, 30 and 35 percent we'll talk about in a second. But if I were you, I would pay the highest interest rate car loan, student loan, whatever, down first and then go to the ones that are lower. However, I think you're going to find yourself in a situation very quickly where probably the interest rates on your credit cards will be increasing because why? Because, again, the credit card companies have till July of to do anything they want until the new laws come into effect where they have to be seriously responsible to you, so be very, very careful with credit cards right now.
Barbara: But what's happening with the credit cards that you take out on promotions that are guaranteed rates for the life of the loan?
Suze: There is no such thing. Listen to me carefully. There is no such thing as a guaranteed interest rate on a credit card. In the little tiny print that all the magnifying glasses in the world can never read, they can raise your interest rates any time they want until July 2010, when the new laws come into effect. But they aren't in effect until the next few months here like when the—you're looking at over a year and a half. So be careful here. Be careful.
Barbara: Okay. Thank you very much.
Oprah: Thank you, Barbara. Interest rates at 32 percent?
Suze: Shocking, isn't it?
Oprah: That is so shocking.
Suze: It's amazing it's legal.
Oprah: You're paying nearly a third.
Oprah: It's unbelievable.
Suze: That's right. So what they are doing to many, many people across the board is you are actually getting a letter. And what they're looking at is not are you making your payments on time every month. What the credit card companies are looking at is: Are you somebody that are paying the minimum payments every month? This is in my opinion what's happening, that are they paying the minimum payments every month and increasing the balance? Because if you're only paying the minimum payments every month, even if you're paying on time—
Suze: —and your credit card balance is increasing, that's indicative of somebody who is using their credit cards to live on, and eventually that person is going to get in trouble. So those are the people that are getting letters from the credit card companies that are revoking their credit cards saying, "We are closing down your credit card, you can't use it anymore, but we are increasing your interest rate to 32 percent."
Oprah: So it would be best to use the credit—to pay the minimum payment but not to continue to increase the balance.
Suze: The truth is, the best thing to do is to always pay more than the minimum payment.
Oprah: You've said that.
Suze: And decrease the balance because if you're only paying the minimum balance, you're never going to get out of credit card debt. It's going to take you years and years and years and—
Oprah: It's a trap.
Suze: —it's a trap. So—so this is the year to say, "I know the trap. I know how to avoid it." Be like a little mouse.
Oprah: That's right. Right.
Suze: You know, they see the cheeses in the trap and somehow they know how to go around there and get that cheese. That's how you've got to be.
Oprah: And then again you improve your FICO score when you pay more than the minimum payment.
Suze: When your debt goes down—
Suze: —to your credit limit, that accounts for 30 percent of your FICO score and that improves, therefore, your FICO score.
Oprah: Okay. Everybody's asking about FICO scores. Can you break it down for us what is a FICO score?
Oprah: And how—and what compromises that.
Suze: You know, FICO scores, FICO stands for Fair Isaac Corporation.
Oprah: Yeah, Fair Isaac. Yeah.