During tough times, credit card debt can be inevitable as you learn to manage credit or are forced to make risky financial decisions due to difficulties.
For Lydia Senn and her husband, who live in Alabama, this was their reality during the Great Recession of 2008 after she lost her job and he took a pay cut. They relied on credit cards to make ends meet and racked up around $14,000 in debt.
“We got our debts paid off in 2014 and decided to just live without a credit card until 2019,” says Senn, who documents her financial journey on her YouTube channel. “We don’t want to rack up high-interest debt, so we’re very strategic about how we use our credit card.”
A plan can help you avoid debt or keep it manageable when money is tight. If your circumstances allow, consider alternatives before you make credit card errors that make it difficult to recover.
1. DON’T SPEND AS USUAL
Change your budget when inflation or other circumstances threaten it. With today’s inflation, Senn adjusted her budget to account for the rising cost of gas, internet, and cell phone bills on her credit card.
“Look at the budget and weigh those needs and wants carefully,” says Katie Bossler, quality assurance specialist at GreenPath, a nonprofit credit advisory agency.
Senn’s grocery bill went from $125 a week for a family of six to $225. Cutting that bill isn’t an option since her husband has lupus and requires an autoimmune protocol diet. “It’s the difference between his thriving and his daily pains,” says Senn.
To offset the rising costs, she scaled back other areas and opted for alternatives. Weekly family gatherings at the local coffee shop have been moved to their patio. The family now eats out less and travels less, and the children attend a cheaper art camp.
When reviewing your credit card statement, consider eliminating unnecessary purchases or unused subscriptions. Prioritize essential things like rent, utilities, groceries, and expenses that help generate income. If you’re still feeling overwhelmed financially after the changes, consider other options like gigging, working part-time, or finding roommates, Bossler says.
2. DO NOT RELY ON YOUR CREDIT LIMIT
Cutting your budget can provide savings opportunities that prevent you from relying on credit cards. Save what you can – even just $5 a week. An emergency fund is foolproof, but a credit limit can eventually be exhausted or reduced at the issuer’s discretion.
Before this happens, request a higher credit limit from the issuers if the accounts are in good standing. That way, as a last resort, you have a loan available that complements an emergency fund. Note that following this request, an issuer may perform a “hard request” on your creditworthiness, an action that may temporarily affect your creditworthiness.
3. DO NOT BRING BALANCE ON A HIGH YIELD CREDIT CARD
A large balance on a high-interest credit card makes purchases more expensive. For credit card accounts rated interest in 2021, the average interest rate was 16.45%, according to Federal Reserve data. Some credit card interest rates are even higher at 29.99%.
While a card’s interest rate depends on economic factors and your creditworthiness, some cards or institutions offer lower interest rates that can save money on current balances. For example, the national median credit card rate at the credit union was 11.21% as of March 2022, according to the National Credit Union Administration.
If you need a debt-payoff strategy, a good credit score (a FICO score of 690 or higher) may qualify you for a transferable credit card, which allows you to transfer a high-yield balance to a new card at a lower interest rate. Balance the cost of the transfer fee and the ongoing interest cost to find the best option. The ideal balance transfer card has no annual fee, a low balance transfer fee of 3% or less, and a long enough induction period of 0% APR to make progress on debt.
4. STOP MAKING ALL CHARGES
If you expect a late payment, contact your credit card issuer quickly. According to a 2022 press release from the Consumer Financial Protection Bureau, a late fee can cost up to $30 the first time and up to $41 thereafter.
According to Bossler, some issuers may be able to change your due date, offer financial hardship programs, or refer you to a nonprofit credit counseling agency that offers a debt management plan. These programs may waive fees or lower interest rates for a period of time.
5. THINK TWICE ABOUT CASH ADVANCES
A credit card cash advance is a convenient way to get a short-term cash advance from a bank or ATM, but it’s expensive. Interest on the cash amount borrowed will begin accruing immediately and fees may apply.
Instead, consider a personal loan or targeted offers from issuers that convert available balance on a credit card into a cheaper installment loan that puts cash in your bank account. The latter option does not require a loan application or credit check.
Credit cards are certainly useful for emergency purchases or maintaining good credit. Nerdwallet offers some tips on smart ways to use credit cards for yourself.