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Using Credit Carefully to Weather Tough Times

If you don't have savings to weather tough times, credit cards may be a lifeline -- if you're careful.There are several disconnects between financial advice and financial reality that annoy me.

One such disconnect revolves around the advice to NEVER carry a credit card balance.

No credit card debt, no problem. It’s abstinence-only financial education. The reality, however, is that lots of us know borrowing against credit cards isn’t wise, but we do it anyway.

In these cases, overly-simple personal finance is misleading. Yes, if you NEVER carry a credit card balance, you won’t get into trouble. But there are times when credit cards may be an undesirable but necessary part of your financial plan.

Today I want to talk about a unique situation: What happens when hit tough times and you have little or no emergency savings but you do have available credit? Is it ever OK to tap that available credit to make ends meet?

Let’s be clear: This is dangerous territory. If you lose your job and use credit cards to just keep on living your current lifestyle, you’re barreling towards a debtor’s hell and possible bankruptcy. On the other hand, using credit cards carefully is better than going hungry. Let’s look at a few examples.

Using credit cards for emergency expenses if you don’t have savings

In my early twenties, I drove two different old Volvos; great cars, but costly to fix. While I learned to do many repairs myself — from spark plugs to brakes — some required many more tools than I owned. These fixes were at least $500, and credit cards were literally the only way I could pay for them.

If you’re suddenly faced with a large expense and don’t have cash in the bank to pay for it, realize that it won’t be the last time. This is why having $1,000 or so in the bank as a buffer is so important and, ultimately, an emergency fund equal to six months’ of expenses.

OK, but you don’t have that right now. So what can you do? Assuming you can’t borrow from family or friends or work your tail off to raise the funds quickly, you have a few options:

  • Overdrawing you bank account. You’ll pay a big fee, tie up your checking account, and risk additional overdraft fees.
  • Payday loans. These loans may be cheaper than getting dinged with multiple overdraft fees, but they come with fees that – if annualized – would be an APR of 100 percent or more! It’s easy to get trapped in a cycle of needing another loan just to pay off the last one.
  • Credit cards. 

The biggest risk of using credit cards is how easy it is to use your card this way every time you have a big expense and then not commit to paying off the balance quickly. If, however, you can pay the charge off in a year or less, the interest expense is comparable to a single $39 overdraft fee. For example, a $500 balance at 15 percent APR paid off $50 at a time would take 11 months and cost $37.52 in interest.

Using credit cards when you’ve lost some or all of your income

It’s one thing to use credit cards for unexpected expenses when you’re employed and then pay the balance off in a few months. It’s another thing if you’ve lost your income, have bills to pay, but have no idea when you’ll be able to start paying off the credit card balance.

As I wrote earlier, when you lose your job or suddenly face a reduced income, you should scale back any debt payments to only the minimum and try above all else to avoid taking on new debt. You may not be able to continue your march out of debt, but at least you want to avoid digging deeper.

But what if you can’t? What if there simply isn’t enough money in the bank to pay the bills each month and put food on the table?

If things get this dire, your first priority should be reducing expenses as much as possible and finding work – any work – fast. You should not be ruling out moving in with family and/or relocating for work.

Beyond that, it may be time to turn to credit cards. Remember, this is truly a last resort. If things come to this, keep a few things in mind:

  • Without an income, you can’t get new credit. What you have is what you have. Applying for new credit and maxing out your available limits will lower your credit score further.
  • Avoid cash advances. The interest and fees are far higher than purchases.
  • Start with the lowest APR first. Avoid using higher APR cards if you can help it.
  • Stay current with minimum payments. If you can only make minimum payments while you look for work, make them on time. A single missed payment could cause your interest rate to skyrocket and jeopardize your access to credit.
  • Know how long you have. When will you be maxed out? You need to find work and reverse the flow of money onto your cards well before that deadline!

Finally, be aware of the consequences. Using credit cards to finance or supplement your monthly living expenses for a long period of time will have one of two consequences: Either you’ll be responsible for paying off big balances at high interest rates or you’ll need to declare bankruptcy. Neither is good. Either you’ll be in debt for years or you will have to pay a lawyer, sell some of your belongings, suffer through the emotional toll of bankruptcy and, ultimately, rebuild your credit from scratch.

Preparation is the best policy for tough economic times like job loss or illness, but if you find yourself turning to credit as a last resort, do so sparingly and intelligently.

What about you? Have you ever used credit to get you through tough times? What advice would you give?

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Nope. But that is why I have a credit card, just in case.

  2. I have used a credit card to get through a tough time. And like the comment above, it’s there just for that reason. I wasn’t excited when I did it, but considering the alternatives (of which you pointed out), it was the least painful route. I worked hard to get rid of it as quickly so I could to keep the interest charges low.

  3. We used credit cards while I was on maternity leave. I was at 70% pay so to make up the difference we used credit for everything. Also during that time we had a lot of people coming after us (IRS, health insurance, ect ) so holding onto cash was a necessity. We only ran up about $3000 on a 0% interest card and are working to pay it off by march before the interest bumps up.

  4. Just used me credit card today for an unplanned expense… I needed new tires. Well, I can’t say it was completely unplanned but just couldn’t afford to save for it. I had to cut my hours at work to finish my last 6 months of school. Drained my savings except about $1000 because my car decided to need tons of work as soon as I cut my hours, along with trying to keep living. Down to the last month and for the first time I won’t be able to pay off the entire bill. Hated putting it on my card but when I was sliding on the wet road yesterday, enough was enough. Tires are something I NEED for school, work, and my life so you have to do whatever it takes.

    But in a month I’ll be done with school and can pick up more hours. And in a few months, I’ll be a nurse and making more money than ever. It was worth it leaning on my credit card and savings to get me through.