A third of all Americans have used credit cards to get through an unexpected emergency. Here’s a step-by-step guide to using your card’s credit line as supplementary income, while you get back on your feet again.
Credit cards are designed to be payment tools that you can use to conveniently purchase affordable things you want. But then there are financial emergencies.
Without enough money to meet necessary expenses, you may decide to use your card’s credit line as supplementary income, building up a balance along the way. Many do. According to a 2020 report from the Federal Reserve, 35% of adults unable to meet an expense with cash will use a credit card and then carry over a debt.
Should you put your living costs on your cards for an extended period of time, though? Although possible, it’s risky and has a strong potential for long-term credit damage. However, say the experts, with a careful approach, it can be done.
Step 1. Make sure it’s an emergency
Most important, says Lauren Bringle, an accredited financial counselor at Self Financial, is to be certain your difficult circumstances really require borrowing from a credit issuer.
“Generally, I define a financial emergency as something that could significantly impact your well-being if you weren’t able to pay for it right away,” says Bringle. “Depending on your situation, that could look like a necessary home repair, like if your plumbing breaks and you need access to water. It could also be something like an unexpected medical expense that you can’t work with your medical provider to create a payment plan for, or losing your job.”
If you can offset the lack of funds with reasonable measures, it’s not an emergency but a momentary setback. This distinction is crucial, says Bringle. You don’t want to get into high credit card debt if you can fix the problem by taking action that does not involve getting into debt.
Step 2. Know how much gap you need to fill
In the event you are experiencing a true financial emergency, a key step to using credit cards as a crutch is to determine the bare minimum you’ll need to charge every month. Start by listing your essential monthly expenses. These usually include:
- Rent or mortgage
- Utilities and cell phone
- Child care and pet costs
- Health insurance
Of course, your regular budget may involve many other expenses, so pare them down to the basics, says Jessica Weaver, a wealth advisor from Chester, New Jersey. Review your credit card and bank statements to see where you’ve been spending, and pinpoint everything you can reduce or forgo.
“Stop eating out, suspend memberships and subscriptions, pursue cheaper cable and phone, refinance your mortgage,” says Weaver. “There are so many ways to lower costs, but you have to make the decision to do it.”
Remember, every dollar you trim is one you don’t have to charge.
This process is not necessarily easy, says Thomas Nitzsche, spokesperson for the credit counseling agency Money Management International. “Financial emergencies are often a very emotional time,” he says. “Everything can seem important, and the tasks involved in reducing costs can feel overwhelming.”
Don’t be resistant to get professional help. Nitzsche recommends booking an appointment with a budget and debt counselor at an accredited credit counseling agency. It’s free, and the counselor will develop an action plan based on your individual situation. They may present suggestions you may not come up with on your own, such as:
- Take on a roommate to share housing costs.
- Apply for government assistance.
- Request utility and phone bill assistance.
- Negotiate with your landlord for partial payments.
- Borrow against your retirement plan.
- Sell assets.
- Trade an expensive car for a cheaper one.
Once you know your lowest budgetary figure, subtract it from any income you do have. Those funds may come from unemployment insurance benefits if you’re not working, income from a partner’s job or any money you can make with temporary gig or part-time work. The final number will be what you can put on the cards (minus an estimated monthly minimum payment for the credit card).
Step 3. Estimate your emergency time frame
Living on credit cards can’t last forever, because eventually you’ll reach the end of your credit line. Consider it a stop-gap measure, not a permanent plan.
“In a lot of cases, you won’t know how long your emergency will last,” says Nitzsche. “It could be a few months, it could be a year. But to the best of your ability, try to project.”
Be conservative with all estimations, however. If you think you can get another job paying at least as much as you did before in two months, plan for three months. It’s better to be pleasantly surprised with an early end than caught off-guard if the emergency extends longer than expected.
Step 4. Gather and prepare your cards
Ready to lean on the cards? Know which accounts will give you the best interest rate for the longest period of time. If your credit rating is good, you may want to add a new credit card to your portfolio Andrea Woroch, a money saving expert from Bakersfield, CA, says applying for a credit card with a 0% introductory APR can be a wise decision.
“Opening a new card during an emergency can help you pay for expenses without worrying about interest fees piling up and gives you more time to make smaller payments until you get through the emergency,” says Woroch.
Many of these cards offer the intro rate for a year and some can go even longer, such as the Wells Fargo Reflect℠ Card that has a 21-month 0% intro APR offer and no annual fee (14.49% to 26.49% variable APR thereafter). This means you can charge and roll over balances without interest added, though any debt remaining after the introductory period ends will be subject to the real interest rate.
If you can’t or don’t want to open a new card, Nitzsche says to list those you do have along with their limits, subtracting any current balances. “You can call the issuer and ask for a limit increase or interest rate decrease,” he says. If the accounts are in good standing and your credit hasn’t taken a tumble, they may oblige.
The cards you use should have the lower interest rate (to minimize the amount you pay in financing fees), and the most charging power.
Your available credit will be a major factor in how long you can live on the cards. For example, if you have $10,000 available on a few cards and need to charge $1,000 a month, the longest you can live on credit is 10 months.
Be aware that maxing out your credit cards will have a negative impact on your credit scores because it affects your credit utilization ratio, but in times of need you may have to sacrifice some points. When you’re back on track and pay the debt down, your scores will rebound.
Step 5. Build the minimum payments into your budget
“A lot of times people beat themselves up by just making the minimum payment, but it’s okay right now,” says Nitzsche. “Use an online calculator to determine the worst case scenario about what that payment could be per month – 2.67 percent of the total balance is pretty standard. Your new budget should accommodate it.”
For example, if you were to run up the entire $10,000 credit line, the estimated minimum payment would be $267. That figure will have to be part of your monthly expenses, otherwise you will fall short.
“Don’t miss a payment because the line can be decreased or the special 0% APR can be revoked,” says Nitzsche. And since credit scores calculate payment history as the weightiest factor, your scores will be negatively impacted. Late payments will remain on your credit report for a total of seven years so the damage will be lasting.
Step 6. What to do after the emergency
“When the crisis is over, you may find yourself in a deep hole,” says Weaver. “The next phase is to pay it all off.
Write down all the credit cards you used and list the minimum payment plus the interest rate for each. You have a choice between paying the card with the highest interest rate first while sending the minimum to others, or paying off accounts with the lowest balance first, then adding their payment to the larger debts. Do what feels right for you, but as you’re doing it, set aside a little for savings.
“The next emergency will come and you will need to have some funds in an account that you can use,” says Weaver. “Yes, paying off the debt will help your net worth, but watching savings grow can rebuild your self worth.”