If you find yourself relying on your credit cards to make it through the current climate, make sure you have a plan. Here are 10 tips on how to use your credit to stay afloat – and not end up deeper in debt.
Credit cards can be useful tools during difficult times. The credit line can give you a financial float while you’re waiting for a paycheck, stimulus check or unemployment benefits to arrive. However, it’s a good idea to manage your accounts with extra care right now, particularly if money is tighter than normal.
According to a CreditCards.com poll about COVID-19’s effect on peoples’ finances, 61% will be affected if they’re unable to work now or in the future and 56% if there is no more government stimulus money. In addition, 62% of those with credit card debt said they won’t be able to make minimum payments in the next three months if the pandemic continues.
Unfortunately, as the pandemic marches on, you may find yourself in an increasingly strenuous financial situation. Here are 10 tips to handle your credit cards wisely today and into the future.
10 tips on how to handle credit during COVID-19
- Refine your budget
- Plan for each charge
- Choose one card and stick with it
- Open a 0% APR card for things you must finance
- Refinance old debt with a new credit card
- Profit from your card purchases
- When carrying debt, use the lowest APR credit card
- At the very least, pay the minimum
- Contact your credit issuer if you can’t meet your payment
- Beware credit-related COVID fraud
1. Refine your budget
If you turn to your credit cards to fill in financial gaps, make sure to plan ahead with a budget. List your monthly expenses and debt payments, then subtract the total from whatever money is coming in. If it’s not enough, refine your budget so you at least come out even.
This process can be challenging, especially if you’ve never done it before, so contact a nonprofit credit counseling agency via the National Foundation for Credit Counseling or the Financial Counseling Association of America for assistance. Their member agencies offer free counseling appointments, and you can do it over the phone to ensure health safety. Your counselor will help you develop a feasible budget and deal with any debt you may have.
2. Plan for each charge
This isn’t the time to borrow now and figure out how you’ll repay the debt later. Before using your credit card, be certain you need what you’re buying and have a repayment plan already in mind, says Karra Kingston, a Union City, New Jersey, bankruptcy attorney.
“People often find themselves head over heels in debt when they start charging everything on their cards,” says Kingston. During economic uncertainty, she urges people to only spend when they’re sure they can and will pay the entire bill. In short, charge the minimum and pay the maximum.
3. Choose one card and stick with it
If your wallet or mobile device is full of credit card accounts, tracking charges and balances can be challenging. It can also lead to excess debt – since if you hit the limit on one, you may be tempted to just turn to the next card.
“Often people fall into a trap of charging on multiple cards, and this usually becomes a disaster,” says Kingston. “They can’t keep up with their monthly payments because they have too many cards to keep track of. If possible, limit the spending to one card so it’s easier to manage.”
As you’re dealing with non-financial COVID-19 related issues, the last thing you want is another complication.
4. Open a 0% APR card for things you must finance
Maybe your high school student needs a better laptop for the virtual classroom, but your savings account is dry. In such a scenario, consider a 0% APR card. With it, you can make purchases and not pay any interest for anywhere between six and 18 months. Just do the math first.
“The aim should be to pay off the debt before the introductory zero-rate interest period expires,” says John Davis, a financial education ambassador for ScoreSense. Because if you don’t, the remaining balance will be subject to the real interest rate, which can be very high.
The calculation is easy: Divide the cost by the introductory months to calculate the necessary payments. If the laptop costs $1,200, and you have 12 months before interest kicks in, the monthly payments should be at least $120.
5. Refinance old debt with a new credit card
If you owe a substantial sum to credit cards that have high rates of interest, consider moving the debt to a 0% APR balance transfer credit card. You will have a fixed number of months to repay the bill with no financing fees added, giving you a break when you most need it.
The new credit card issuer will usually charge a transfer fee of a few percentage points of the balance (currently 5% is the norm), but it can be a great way to restructure your debt so it costs less overall – and streamline credit card management so you can concentrate on other things.
6. Profit from your card purchases
Have a credit card that offers points, miles or cash back? As long as you can pay the bill in full, use it for as many of your expenses as possible.
Each dollar you charge will result in valuable rewards. Just choose the right card. “If you feel confident in your ability to pay the bills that accrue, it may make sense for you to use cash back cards instead of travel cards because their benefits will have a tangible immediate benefit,” says Michael Gerstman, CEO of the Dallas-based retirement planning firm, Gerstman Financial Group.
On the other hand, you may be eager to take a trip as soon as you can, so the travel card might be preferable. “When tourism picks up again, the accrued miles will be waiting for you, and you’ll probably need a vacation,” says Gerstman.
7. When carrying debt, use the lowest APR credit card
If you must use a credit card and carry over a balance, select the one with the best APR. “Due to your financial constraints, you may need to tap into your credit cards more than usual,” says Joel Klein, founder of the Crafty Dollar. “To avoid facing a mountain of credit card debt, prioritize using cards with the lowest interest rates first.” It makes a difference.
For example, if you charged $5,000 to a card with a 12% APR, it would cost $330 in interest to pay off in a year. If the APR is 28%, however, the total interest would be $790. There’s no reason to overpay in fees if you have an alternative.
8. At the very least, pay the minimum
Living debt-free is ideal, but it may not be possible for many Americans. As of August 2020, the unemployment rate in the U.S. was 10.2%, as reported by the U.S. Department of Labor.
If you’re not receiving unemployment insurance, or do but it’s not enough to cover your living expenses and delete your debt, focus on the minimum payments and send them by the due date. This way, you will at least protect your credit scores, says Rebecca Hunter, CEO of The Loaded Pig.
“Payment history accounts for 35% of your FICO credit score,” says Hunter. “You should make it a priority to make your payments on time.” When you’re in a better position, you can drive the debt down.
9. Contact your credit card issuer if you can’t meet your payment
In the event that you can’t make the minimum payments at all, take action. Get on the phone and ask for a reprieve. Each credit card issuer has its own policies, but most are doing something to help their customers who have been affected by the coronavirus pandemic.
According to the Consumer Financial Protection Bureau, you may be able to arrange a lower or deferred minimum payment, waived or refunded late fees, an interest rate reduction and an affordable payment plan for the balance due. Your issuer won’t come to you, though.
See related: How to deal with creditors when you can’t pay
10. Beware credit-related COVID fraud
As you’re trying your hardest to make the most of your money and credit during this tough time, so too are crooks. According to Fidelity National Information Services Inc, attempted credit and debit card fraud increased since coronavirus hit; attempted fraudulent transactions rose 35% in April from the previous year.
The U.S. Cybersecurity and Infrastructure Security Agency issued a warning for consumers to look out for emails with a coronavirus-related subject line. Crooks are aggressively using phishing scams to get you to reveal your credit card account numbers and other personal information to commit fraud. Do not open any attachments or hyperlinks, and send the email to spam.
Be vigilant with checking your credit card statements for accuracy, too, and dispute any evidence of fraud immediately.
See related: Credit card scams in the time of coronavirus
Whatever the future holds, know that you can take steps to mitigate problems before, during and after they happen. When things settle down and life becomes more predictable and prosperous, you can revert to your post pandemic ways – but with more skills and experience to fall back on should trouble erupt again.