Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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!)
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.
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