Living off credit cards alone for a year is a terrible ideaCredit cards are made to be short-term loans and should only be used as suchBy Erica Sandberg
Dear Opening Credits,
Hi Erica, I lost my job last
year. I was living off money I had in the bank, but it's getting low, and my
unemployment is ending in three months. I have no credit card debt right now,
but I do have a combined credit line between three cards of almost $48,000. The
highest interest rate for my cards is 18.9 percent, but the lowest is 9
percent and the middle one is 12 percent. How bad will it be if I used my
credit cards for my mortgage, car note and other bills until I found a job? I
was making $42,000 at my old job, so I could definitely live on my credit cards for
at least a year! What do you think? Thanks in advance for your advice -- Brandon
(P.S. The only good news, I guess, is that I'm single and have no kids to
support!)
Dear Brandon,
Can a credit line be used for crisis
cash flow if you are unable to secure employment? Maybe. Is it a good idea? I'm
going to have to say no.
Credit cards are designed as short-term
loan instruments and should only be used as such. They allow you the ability to
charge goods and services and delay full payment for about 30 days with no
added interest charges -- or you can make a partial payment and roll the
remaining balance over to the next month, with finance fees applied. Obviously,
credit cards are not intended to be income replacement tools. So while I
commend you for entertaining an imaginative way out of a bind, your plan has
some major flaws.
An immediate problem that comes to mind
is that of credit access. Though you assume you have access to a large sum of
money, there is no guarantee those funds will really be available to you when
you need it. Credit card companies are dramatically scaling back and adjusting credit lines right now. You could wake up tomorrow and find your ability to
charge reduced by half or more. This is something you have no power over. And
Brandon, it's most important that you control your finances rather than leaving
them to chance.
The next huge hitch concerns monthly
payments. Let's say you did start to draw on those accounts. Without a steady
earnings source, how do you intend to pay those credit card bills? If you think
you can use one card to pay the other, stop right there. Go down that road, and
it won't be long before you accumulate massive balances on all the accounts,
which would be a signal to your creditors that your finances are insecure. If
your credit lines have not been slashed before, there's a high probability they
would be with that type of activity.
Another issue is the overall cost of
using credit cards this way. I'm not sure if you think your interest rates are
low, but they aren't if you use the cards for long-term financing. Unless you
paid your balances in full in a few months, a lot of money would be applied to
what you spent. Credit card interest compounds -- it's calculated not just
on what you charged but also on accumulated
interest, and debt can balloon at a truly astounding pace. (According to
legend, Albert Einstein once declared compound interest to be "the most
powerful force in the universe.") Assuming you did spend $48,000 in a year but
made only minimum payments, you could be faced with over $80,000 to repay at
the end a 12-month period.
Lastly,
don't forget about your credit report. Many employers are pulling applicants' reports and analyzing the listed information to determine whether they're
suitable candidates. High debt can be construed negatively, and missing
payments -- certainly a possibility if you don't have a way to pay -- is never
viewed favorably. Therefore, just by living off those cards, you can inhibit
your job opportunities.
It should be pretty clear by this point
that using plastic as a salary substitute is a poor scheme. So what's a better
plan? Well, keep seeking work. I know it's hard out there, but as you say, you
are unencumbered by a spouse and children. If you aren't successful in finding
employment in your immediate area, you have the option to move to where the
jobs are without having to displace an entire family. While you're looking,
pare your expenses down to the bare minimum. You may even consider selling your
home (if possible) and moving to less pricey digs. You're on a roll with
creative solutions to a potentially big problem and have no current credit card
debt to worry about, so keep exploring realistic and less costly ways to
survive during your job search.
See related: Fed report: Credit keeps tightening, though not as rapidly, 10 things you must know about credit reports and scores, 9 tips for job seekers with bad credit
Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
Send your question to Erica.
Published: November 4, 2009
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