Even under so-called “normal” circumstances, some people may have an ambivalent-at-best relationship with credit card use. A person’s first card likely represents freedom and independence—as an adult, those cards might instead symbolize great stress.
Credit-reporting company Experian® says credit card debt is the second-fastest-growing debt behind personal loans, and that the average credit card debt for Americans is $6,194 (with an additional $1,155 on retail credit cards). And 43.9% of credit card holders are referred to as “revolvers” by the American Bankers Association, meaning they carry at least some debt from month to month.
Unfortunately, with the global coronavirus pandemic, there’s no doubt economic circumstances are not normal right now. Should the approach to using credit cards change during a crisis? Here are some ins and outs of using—and rethinking how to use— credit cards:
Is It Smart To Use Credit Cards Now?
Just as in pre-coronavirus times, 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 still in effect: 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, many banks and lenders are offering relief in the form of rolling out new policies to ease the burden for card holders who are struggling with their payments. Some are waiving fees, offering payment deferral or forbearance, or increasing credit lines—some banks are even offering 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 this time—the better option might be to contact your card issuer for information and any fine print that might go along with these possible perks. And 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 lead to four times the price of purchases paid back over decades. The interest—especially compounding interest, which is essentially interest on interest already due—can often be the big killer with credit cards. But there are ways to potentially avoid interest on credit cards, such as paying off a balance in full each month.
Even if your income seems stable, if there’s one thing we’ve all been learning through COVID-19 it’s that one can never really predict what is about to happen a week or two later. Now, more than ever, it might be a good idea to use your credit cards responsibly. Part of that responsibility now means knowing what responsibility means for you and your situation—while being one of the revolvers the American Bankers Association tracks isn’t necessarily something to be thrilled about, the costs might be worth enduring if it means you have the necessities you need for survival now. It obviously isn’t irresponsible to charge things you truly need to survive—after all, priorities shift during a crisis. But only you will know what you need.
Planning for the Future—Starting Now
Conversations about using credit cards, global pandemic or not, are really about responsible saving and spending. There is no blanket yes or no answer to whether it’s a good idea to use credit cards right now—although it’s certainly possible to be a little wiser about using a credit card.
FINRA, the Financial Industry Regulatory Authority, reported in 2018 that nearly a third of households would struggle to cover an unexpected $2,000 expense—and while credit cards might be a source of uncertainty or stress, it’s also true that they are not necessarily bad. After all, credit cards might be a key component of establishing and maintaining a credit history, and they of course come in handy for unexpected (and some expected) expenses.
If you’re looking to be spread less thin in the here and now, however, it might be worthwhile to hunt for credit cards that might 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. These calls usually take just a few minutes, so it might be worth a shot. Even if a credit card company can’t do it now, they might be able to do it later—and if you do get a rate decrease, it’s possible to use that when negotiating on another card for a rate to at least match it.
Another alternative might be to consider a cash-back credit card, one 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 want to make. But, of course, it is not recommended to spend on purchases just to earn a little bit more. The idea with these cards is knowing that cash reward is there versus, say, points that can be redeemed from a catalog of items that might not be essential for survival right now.
There are also balance-transfer credit cards, or a card you would transfer existing card debt to, usually at a lower (or maybe even 0%) annual percentage rate (APR). The rationale and incentive for these cards is to 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 are wrinkles to employing this strategy, however, so you might want to consider reading the fine print. The idea is you can pay off that balance with no interest on a more compressed timeline than you might otherwise. That lower rate might change after the introductory period, which must be at least six months according to the Credit Card Act of 2009, but can last longer. If you are unable to pay your debt off before the introductory period is over, you may be saddled with an APR that could be even higher than the one you had to begin with. Also, you might want to watch out for any balance transfer fees. Usually, these cards have to be issued by a different company than one you already bank with.
Just be forewarned that while signing up for new cards can make things slightly easier right now by increasing purchasing power, it might only be worthwhile if it helps pay required monthly expenses. Extraordinary times can call for extraordinary measures.
Putting the Cards Down—For Now
If the idea of getting more plastic feels more like a problem than a solution, another route might be to consider a loan to consolidate your current credit card debt. Similar to balance-transfer credit cards, one common use for unsecured personal loans is to consolidate revolving and/or high-interest debt into one loan, ideally with lower interest rates and fees.
Personal loans might make it easier to manage debt all in one monthly bill, with a set end date when your debt will be repaid, and it could end up helping you save money in the long run. SoFi has fixed rate, unsecured personal loans with no fees that can be used to help cover expenses and keep moving forward. And if you’re looking to find ways to tame those credit card bills, SoFi also offers credit card consolidation loans, with no application or origination fees and no pre-payment penalties.
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