Using credit to manage monthly income swings

With budget shortfalls, credit cards can be a help, or a hindrance


Using credit to manage monthly income swings
Using credit to manage monthly income swings

It's hard enough to create and stick to a budget when you're working with the same amount of money every month, but new research suggests that many Americans' income fluctuates wildly from month to month. While a savings account should be your first go-to choice when money runs short, credit cards can -- in some cases -- be an effective tool for managing the slack.

A May 2015 study by the J.P. Morgan Chase Institute found that 41 percent of Americans surveyed experienced income fluctuations of more than 30 percent from month to month. That's like making $5,000 one month and $3,500 or less the next.  

The problem occurs when people with fluctuating incomes allow their monthly take-home pay to determine their lifestyles, says Julie Ford, a fee-only financial planner in New York. When there is a good month, they live more lavishly, and when money is tight, it's time to scale back. However, if excess money is spent in June and then less than usual comes in July, you may find yourself with too little cash to get through the entire month.

Using credit is ideal only if you are disciplined enough to create a budget that accounts for those expenses. If not, there are other, perhaps more prudent, ways to adjust your lifestyle to meet income fluctuations.

Using credit to bridge the gap
When used wisely, a credit card can provide a quick infusion of cash. But if you don't pay the balance off each month, you could end up in a hole too deep to easily dig out of. "People who utilize credit in this way often end up having to go to someone to help them pay that back eventually," says Natasha Bishop, a Nashville, Tennessee-based division manager for financial counseling organization Apprisen. "It's kind of a vicious cycle. So it's better not to start it," Bishop says.

However, there are some smarter ways to use credit cards to manage fluctuating income.

  • Find a promotional offer. If you know your income is going to be erratic for a few months and you want to buy time to bring stability to your finances, look for a card that offers a 0 percent promotional rate. That's what Chantay Bridges, a real estate agent in Los Angeles, did when she would at times go months without a sale. "I would use cards with a 0 or 1 percent interest rate," she says. Once she earned a commission on a sale, she would pay the balance off. If the bill wasn't paid off by the time the promotion ended, she would find another promotional card to transfer the balance to.
  • Take advantage of rewards. Those who have no credit card debt and enough savings to tide them over are in the catbird seat. Rewards are one of the primary benefits of credit cards, Bishop says. Using them to get cash back or enough points to fly to visit a relative can even help you come out ahead. The key is making sure you're not carrying a balance from month to month, since interest will wipe out any benefits from cashing in the rewards.
  • Use the card with the lowest rate. If you know you're not going to be able to pay the entire balance off each month and have multiple credit cards, make sure you're using the credit card that has the lowest interest rate, Bishop says.

Start focusing on saving enough income to smooth out those rough edges.

-- Becky House
American Financial Solutions

Above all else, make sure you never miss a minimum payment, Ford says. Doing so could cause your interest rate to rise and damage your credit score, which over time will cost much more than that minimum payment.

Ending the shortfalls forever
Unless you have a hefty savings account and are using plastic strictly to earn rewards, you should wean yourself from the need to turn to credit, experts say. Even with irregular income, there are ways to avoid coming up short.

  • Expect the least. While it's great to be optimistic, it makes more financial sense "to build a budget based on the least amount you're going to be making," says Bishop. Gather four to six pay stubs from the past three months and base your budget on the smallest payday. Even when you make more, continue to stick to your bare-bones budget so "you're not emotionally riding that wave every month," Ford says.
  • Create two budgets: one fat, one lean. One way to deal with income swings without reaching for a credit card is to create a budget for months when you make a lot of money and a budget for those leaner times, says Becky House, education and communications director for American Financial Solutions. The lean budget would include your basic monthly needs. During the more prosperous months, you might indulge yourself by eating out a few times more, but House advises consumers to "take a chunk of that money and slide that into savings."
  • Explore alternative money sources. Credit cards aren't the only source of quick cash. Family members and friends might be willing to offer you a low-interest or no-interest loan. There are other creative ways to make money to help compensate for monthly shortfalls, such as starting a side business. One service, Activehours, lets employees who get paid via direct deposit access their paychecks in advance for a donation. "With credit cards, you're borrowing money that you'll eventually have to pay back (and usually at a price in the form of interest or late fees), but with Activehours you're relying only on yourself and your earned income," says founder Ram Palaniappan.

Whatever way you choose to bridge the gap, make sure you're working to build a more stable future, says House. "Start focusing on saving enough income to smooth out those rough edges."

See related: 5 things people fail to budget for, Work hours cut back? You have hard budget choices ahead

Published: June 17, 2015

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