The COVID-19 pandemic has left many people in dire financial situations. Millions have lost jobs, hours, or a portion of income. This makes some of the basic “rules” about credit cards unrealistic, if not impossible, to follow.
You work to build good credit so that when emergencies do strike, you have the flexibility to meet your needs. Credit cards are one method you can use to survive the disruption in your income. Here, we take a look at some of the traditional rules and how you can use them to your advantage in the current environment.
‘Don’t Hurt Your Credit Score’
Why it’s OK to break it: You build good credit so that you can fall back on it when you need it. This is when you need it.
Your credit score isn’t a trophy. It’s a tool. Yes, you want to build your score. One reason you do is so you have access to credit when you need it. If you can’t tap your credit in bad times, then what is the point of building it?
Feeding your family, keeping your home, and being safe are more important than a high credit score. If you need to run up a high balance to cover necessities, apply for a new card, miss a payment, so be it. There are ways to minimize the damage – contacting the card issuer to discuss options like reducing payments or requesting a credit limit increase is one of them. The emergency will eventually pass, and then you can work to rebuild your score. For now, focus on meeting your needs.
‘Never Carry a Balance’
Why it’s OK to break it: Yes, credit card debt is expensive. But the cost may be worth bearing if you don’t have the necessities, or if you need to preserve cash.
Most credit cards charge very high-interest rates on balances you carry from one month to the next. Many times this rate exceeds 20 percent. But in a crisis, paying less than the full monthly credit card total can help you stretch your resources.
If you have a credit card bill of $1,500 with an APR of 20%, pay $500. The remaining $1,000 will cost you about $17 in interest for a month. This might be acceptable in the short term. One option is to call the card issuer and ask for an option to delay payment or for a break on your interest rate, at least in the short term.
BONUS: It is believed that if you buy something you can’t pay off immediately, it could indicate that you’re living beyond your means, that you’re buying things you can’t “afford.” But if your income is gone, you can’t “afford” much of anything. Charging some things to get through the crisis is not irresponsible.
‘Pay More than the Minimum Amount Due’
Why it’s OK to break it: Making the minimum keeps your account in good standing when access to credit is critical.
The minimum payment specified on your credit card statement is typically 2-4% of the total balance, which is enough to cover the previous month’s interest and a bit of the principal. Paying just the minimum, if you make a habit of it, will keep you in debt indefinitely.
But a crisis isn’t regular activity. You may be a little short on money to pay utility bills, make the house payment, or to buy groceries. It may be better to put off paying the entire balance until later.
The minimum payment on time is the only thing legally required of you. Doing so keeps the account active and avoids a penalty APR or late payment charge. It’s only temporary relief, but you can attack the debt more vigorously once the crisis passes.
‘Never Use More than 30%’
Why it’s OK to break it: Maxing out will hurt your credit scores, but the damage isn’t permanent.
Credit utilization is the term for how much available credit is being used. It’s a major factor in your credit scores – the lower your utilization, the better your scores. Normally it’s good to keep utilization below 30%, and staying under 10% is even better.
Current scoring models look at your current utilization, not utilization history. And a missed payment does more damage to your score than high utilization does. Using a higher percentage of your available credit may be necessary to buy groceries and other essentials during an emergency. After the crisis, when you can pay off more of the debt, the utilization goes down, and your score goes back up.
BONUS: If you think income disruption is coming, consider expanding your available credit, both to keep utilization down and to gain flexibility. You could ask for a credit limit increase on your current cards or apply for a new card. Of course, good credit is needed to take these steps.
‘Pay off Debt Instead of Using 0% Introductory Rates’
Why it’s OK to break it: Transferring a high-interest balance to a credit card with a 0% introductory period can buy time when you need to preserve your cash for necessities.
You usually make a balance transfer so you can pay off the transferred debt during the 0% APR period, before the regular interest rate kicks in. If a card gives you 15 months at 0% APR on balance transfers, you could avoid interest completely by paying off the debt within that 15 months.
Preserving cash is a priority in a crisis. Making just the minimum payment often makes more sense. You might still have a balance at the end of the 0% period and have to pay the ongoing interest rate. But during the crisis, you can focus on covering necessary expenses.
BONUS: Paying a deferred interest offer on a store or medical card could be a higher priority. If you still have a balance at the end of the promotional period – even a dollar or two – you will see substantial retroactive interest charges.