It’s generally unwise to carry a balance, but sometimes the alternatives are worse.
No reputable personal finance expert will recommend routinely carrying a big balance on a credit card. It’s expensive, it can damage your credit and it can encourage you to spend more than you should.
Nonetheless, in a rocky economic climate, sometimes carrying a balance isn’t as poisonous as the alternatives, says Eric Tyson, author of a personal finance book and founder of EricTyson.com. “During bad economic times — and even during good ones — there are occasions when tapping the credit feature on a credit card can make sense,” he says.
That’s not to say there aren’t caveats: any time you carry a balance, you’re taking a risk, says Liz Weston, author of “Your Credit Score” and personal finance columnist at MSN Money. “If you have a balance, you’re subject to the whims of the credit card company. They can change almost any rate or term with very little notice,” she says. “You’re always playing with fire when you carry a balance, but in this economy, you’re playing with hand grenades that somebody pulled the pin on.”
Here are a few times when carrying a balance may be a reasonable thing to do.
1. Your only other alternative is a payday loan. Think your credit card terms are onerous? Then you’ll be even more appalled at those set forth by payday loan companies, whose fees, if annualized, can be 200 percent interest or more. “Payday loans are usually very expensive,” says Tyson. “People who are really pinched for funds will generally find that credit cards offer more attractive terms than that of a payday loan.”
2. You’re using the balance as part of a broader financial plan. Perhaps you’ve got to make a several-thousand dollar purchase, and you’re wary of drawing your savings account dramatically at once. You may reasonably decide to pay it off over a few months, says Sandra Shore, senior counsel at Novadebt, a New Jersey based credit counseling service. “If you’ve got the money in your account if you need it, then using your card this way is a money-management strategy,” she says. There is a cost to this strategy, but it can provide peace of mind for those who don’t want to drain their savings account for a major purchase.
3. You suspect you’ll soon be facing bankruptcy. Weston says it may seem counter-intuitive for people to pile up debt on a credit card when they’re in serious financial trouble, but it may be a financially savvy move. “People want to be responsible and pay off their card, but if they’re going to wind up in bankruptcy court anyway, the smart thing to do is to conserve your cash,” she says, “because your debts could be erased in bankruptcy.”
Be very careful with this, though. If you are certain you’ll be filing, then running up credit card debt could result in the debt not being discharged — or even fraud charges against you. “This underscores why it’s so important to talk to a bankruptcy attorney as soon as you suspect bankruptcy might be an option,” says Weston. “He or she can advise you about how to handle your current debts.”
4. You’re starting a business. With bank loans drying up, and Small Business Administration-backed loans slowing to a trickle, credit cards are now the most common source of financing for America’s small-business owners. According to a National Small Business Association survey, 44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months. That’s more than any other source of financing, including business earnings. By contrast, in 1993, only 16 percent of small-business owners identified credit cards as a source of funding they had used in the preceding 12 months.
“It’s not easy to get a bank loan — especially if you have an unproven or startup business,” says Tyson. “But if people shop around and find a credit card with a low interest rate, borrowing for business purposes can be worth considering.”
5. You’re dealing with short-term unemployment or cash-flow crunch. Weston pays off her credit cards each month, but when she had a three-month gap between jobs a few years ago, she used her credit card instead of depleting her savings. “When you’re unemployed or have a cash crunch, sometimes the smart thing to do is conserve your cash and just pay the minimums,” she says. The same is true for contractors who do the bulk of their business in a single season and have to ride out the slow times — but still expect to have cash coming in the near future.
6. The math works in your favor. On occasion (though less frequently in this economy), you’ll have a better deal on your savings account than the terms on your credit card. In these circumstances, you can use this spread to your advantage, says Shore. “If you’re buying furniture, they’re offering no finance charges, your credit card rate is locked in at 3 percent, and you’re getting 4 percent on your savings, then it might be OK,” says Shore. It’s easy for this plan to go awry, she cautions, so pay even closer attention to your bills to make sure no terms change. Oftentimes, the money you’ll be saving is so minimal that it’s not worth the hassle, but it remains an option.
7. You’re facing a true emergency. Many people first get a credit card only for use in an emergency, says Weston, but soon find that the “emergency” is a Macy’s sale. If something catastrophic happens — you lose your job, you have a major medical emergency or your furnace goes on the fritz in the dead of winter, you may end up putting (and keeping) a balance on your card. But make sure you create a plan to dig out of debt, fast. “People want to be optimistic, they want to think they’ll get a low-rate balance transfer credit card offer,” Weston says. “But they’re fooling themselves if they don’t think there will be consequences.”
See related: 7 tips for starting a credit history in an economic crisis, 7 things not to do when you’ve maxed out your credit cards, Credit card statistics, 10 things you must know about credit scores and reports, 8 things you must know about credit card debt