When you’re in a crisis and economic circumstances feel anything but normal, you may wonder if you should rethink the way you’re using your credit cards. Here are some ins and outs of using — and rethinking how to use — credit cards during an emergency.
Key Points
• Using credit cards for essential expenses can help manage cash flow during financial crises, but avoid nonessential purchases.
• Make minimum payments to avoid penalties and explore balance-transfer cards.
• Cash-back rewards and increased credit lines can provide financial relief.
• Check for issuer relief options and negotiate lower interest rates.
• Consider unsecured personal loans and prepaid cards as alternatives.
Is It Smart to Use Credit Cards During a Crisis?
Even during a crisis, credit cards aren’t magical “buy anything and worry about it much, much later” tickets. Many of the basics for using a credit card are in effect no matter what’s happening around you: Don’t make purchases just to get reward points, report missing or stolen cards immediately, be in the habit of checking your statements every month, etc.
That said, sometimes certain accommodations are made during a crisis. During the Covid-19 pandemic, for instance, many banks and lenders offered relief in the form of new policies to ease the burden for card holders who were struggling with their payments. Some waived fees, offered payment deferral or forbearance, or increased credit lines. Some banks even offered these three forms of support, and more.
Of course, it’s unwise to assume a bank or credit card company is focused on looking out for you during an emergency situation. The better option might be to contact your card issuer for information and any fine print. And keep in mind that while the ability to increase your credit line might sound good, it could also cause more headaches down the road.
Making minimum payments on credit cards can cost you substantially more money over time. The interest — especially compounding interest, which is essentially interest on interest already due — can often be a big challenge with credit cards. But there are ways to potentially avoid interest on credit cards, such as paying off a balance in full each month.
During a crisis, it’s a good idea to continue using your credit cards responsibly. Of course, sometimes financial situations change, and you may need to use a credit card to pay for your daily essentials. While carrying some debt from one month to the next isn’t necessarily something to be thrilled about, it might be worth it if it means getting the things you need to live.
Planning for the Future — Starting Now
Conversations about using credit cards are often about responsible saving and spending. There is no blanket yes or no answer to whether it’s a good idea to use credit cards during a crisis, although it’s certainly possible to be a little wiser about using a credit card.
If you’re feeling spread thin financially during a crisis, however, it might be worthwhile to hunt for credit cards that can offer more reasonable rates than your current cards. A good place to start might be with your current card issuers and see if they can lower the interest rate.
Another alternative might be to consider a cash-back credit card that offers cash rewards in a small percentage back on each transaction. Depending on the issuer, the card might offer higher rates for certain categories of purchases, so it might be worth doing some research and strategizing if there is a big purchase you had already planned on making.
There are also balance-transfer credit cards, or a card you would transfer existing card debt to, usually at a lower annual percentage rate (APR). The rationale and incentive for these cards is to hopefully lock your credit card debt in at a lower rate than it would be currently, to therefore make it less burdensome to work on paying it down.
There can be wrinkles to employing this strategy, however, so be sure to read the fine print to avoid balance transfer fees or other charges. The idea is you can pay off that balance with no interest on a more compressed timeline. However, that lower rate might change after the introductory period, and you may be saddled with an APR that could be even higher than the one you had to begin with.
Putting the Cards Down — For Now
If the idea of getting more plastic feels more like a problem than a solution, you may want to consider taking out an unsecured personal loan. This type of loan is not backed by collateral and is likely to have higher interest rates and lower loan amounts than secure loans. They also typically require a higher level of creditworthiness than a secured personal loan does.
There are common uses for unsecured loans, including:
• Paying off credit cards
• Consolidating debt
• Covering home renovation projects
The Takeaway
Dealing with a crisis can be unsettling, especially if your finances are less than stable. You may wonder if it makes sense to use your credit card to pay for everyday essentials. While there’s no one-size-fits-all answer, it’s important to continue using your card responsibly, whether you’re in an emergency or not.
If you’re stretched thin financially, there are strategies you can consider. One idea is to try to negotiate a lower interest rate with your current card issuer. Another option is to explore a cash-back credit card or a balance-transfer credit card, both of which could help increase your purchasing power during a crisis. Or you may also want to consider taking out an unsecured personal loan, which could help you get the funds you need to pay bills or consolidate debt.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Is a credit card good for emergency situations?
In an ideal world, you’d use cash during an emergency situation. If that’s not an option, a credit card can help you pay for any unexpected expenses. However, you’ll want to be sure you can pay off the balance in full so you don’t incur interest.
Can I use a personal loan to pay off debt?
Personal loans can be used for nearly any purpose, including paying off debt. Debt consolidation loans can help you streamline multiple debts into a single payment, potentially at a lower interest rate.
Where should I keep an emergency fund?
The Consumer Financial Protection Bureau recommends a few different places to keep your emergency fund. You can put the money in a dedicated account with a bank or credit union. You can keep cash on hand, either in your home or with a trusted family member or friend. Or you may decide to load money onto a prepaid card.
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