When money is tight, it’s all too tempting to use a credit card to make purchases. But what might seem like an easy solution tends to become a long-term problem. Credit cards must be used wisely, especially in a tight economy.
Understanding how to use credit, as well as its alternatives, can set you up for financial success as the economy recovers. Using credit recklessly, on the other hand, can drag your finances down, no matter what is going on with the broader economy. Here’s what you need to know:
Don’t Take on More Debt
The last thing you want to do in a tight economy is to take on more debt. While the cash infusion might be helpful, remember that interest charges add up. You’re better off exhausting other options, such as family assistance, before you resort to taking out a loan.
Start by leaving your credit cards at home. Make most, if not all, of your purchases either with cash or a debit card. This will force you to only spend the money that you have, leading you to be more frugal with your spending habits. If you have existing debt, do what you can to keep chipping away at it.
Avoid opening new credit cards until you’re financially stable. Credit card companies might try to entice you with rewards programs, but don’t be swayed. Unless you can afford to pay your balance in full each month, the perks aren’t worth the fees.
Keep Your Accounts Active
Just as you shouldn’t open new accounts right now, nor should you close old ones. Beware that some banks will close accounts that have been inactive for more than one billing cycle. If you are worried about your accounts being cancelled, continue to utilize them in low-dollar ways.
Set strict spending goals for yourself. When you do make credit card transactions, pay off the balance immediately.
Keeping your credit cards semi-active will help you maintain a healthy credit score for two reasons. First, one component of your credit score is account history; longer relationships provide more of a boost. Second, low credit utilization reflects well on you as a borrower.
Should you ever close a credit card? Only if you’re too tempted to use it, and only then if you’ve paid off any remaining balance. Otherwise, keeping it open with a low or zero balance will make it easier for you to get credit in the future, should you need it.
Review Your Recurring Payments
Recurring payments are a wonderful and terrible thing. To be sure, they’re a convenient way to stay on top of your finances during normal circumstances. But if you’ve lost income or expect to soon, automated payments can be risky.
Forgetting about one of these recurring payments could prove to be a costly mistake. Not only might you be paying for something you don’t need, but the payment could bounce if you’re not keeping an eye on your bank balance. At that point, you’ll owe not only the original amount, but any fees assessed for insufficient funds.
Any time the economy takes a hit, audit your recurring bills. Ask yourself whether you really need non-essential services, such as Netflix. Cancel any you aren’t using, and keep the verification message in case you’re charged after the cancellation. Check your bank statements to be sure you aren’t missing any recurring payments.
Watch Out for Scams
A tight economy is tough on everyone. Unfortunately, that causes some people to make some questionable decisions. Desperation makes them more likely to fall victim to financial scams they might otherwise see coming.
Start by checking the security protocols on your financial accounts. If you haven’t changed your passwords in six months or more, go ahead and do so. If your card information is stored on any sites, remove it. Enable two-factor authentication on every account that offers it.
Most importantly, be skeptical. Far too many credit card scams occur because of what appears to be a “harmless” message or online deal that’s too good to be true. These may be phishing schemes; if you click the link, your sensitive financial data may be harvested by the sender.
If your card does end up getting compromised, call your credit card company as quickly as possible. Request that they cancel your card and send you a new one as soon as possible. Legally speaking, you aren’t liable for any fraudulent transactions made on your card.
Take Advantage of Benefits
One upside of credit cards is their rewards programs. Take advantage of any that wouldn’t require you to change your purchasing habits. Never spend money on a credit card just to snag a reward.
If a credit card allows you to choose between multiple redemption options, opt for a statement credit. Airline miles may seem like a sweet deal, but how much money would you spend on vacation? Entirely too much, at least until the economy recovers.
What about other perks? Never say “no” to things like discounts, free rental car insurance, or credit monitoring services. But again, don’t spend money you wouldn’t otherwise simply because it nets you a small reward.
Keep an Eye on Interest Rates
Interest rates tend to fall or rise rapidly in tough economic times. As the Federal Reserve slashes the target interest rate, so, too, do credit card companies.
If you spy a better interest rate on a different card, consider a balance transfer. Just make sure the better APR isn’t a promotional offer, after which the rate tends to skyrocket.
Another reason some credit card companies raise rates is to cover rising default rates. If you notice your interest rate increases, check your cardholder agreement. Don’t be afraid to reach out if you think the increase violates the terms of your cardholder agreement. Above all, be patient and careful with the financial decisions you make during tough economic times. Using your credit cards smartly will help you both in and out of a recession and on your way to financial independence.