This weeks personal finance brain trust question was:
What goes through your mind when people say that they HAD to use their credit card to get by? Is using a credit card when you can’t afford to pay a smart or necessary thing to do?
WC – A 27-year-old writer living in Chicago and writing about personal finance through The Writer’s Coin.
I think that people should take that as a warning. I realize for some people it’s the only option, but anyone that catches themselves saying that should really reprioritize to make sure that it doesn’t happen again and that they’re not making things worse by paying with a credit card. Whether it’s “smart” or not depends on how big of a hole they’re digging and what the alternatives are. If they could cut their spending somewhere, then it’s a bad call.
Credit cards have the potential to help but also the potential to make things worse, and not realizing that is a huge mistake. For the people out there who have no choice and have nowhere else to turn—credit cards are a serious warning. If you can’t get by without them you are in deep trouble and something needs to change ASAP.
Patrick Bryan – Living in Northern Ireland, Patrick helps people in a very different environment and economy but yet, mush is universal and much is the same. Visit Patrick’s Northern Ireland blog on debt.
To pay your essential bills on your credit card is clearly a danger sign, however I can’t condemn people for doing it, and I can understand why it feels like the only alternative at the time. Many people also have temporary cashflow issues, and using credit cards helps them get by until (for example) their bonus is paid, or a big contract comes in. It is a great way of getting fast, accessible credit for short periods of time. I use my credit card for most of my purchases (including groceries and fuel) and enjoy 56 days interest free borrowings, why shouldn’t I use the credit cards money for free in that way? I always make sure however to pay the bill each month and use this discipline to keep control of any of the wilder spending urges I experience.
My advice to people who are finding that they have to use credit to get by is to first look at their budget – identify what is happening and take action. If it is going on non-essentials and you are not clearing the bill each month, stop buying them! If you still have a shortfall each month you need to ask yourself some tougher questions – can you downsize the car, shop at cheaper stores, cut back on the family vacation next year? Ask yourself this question – “if credit cards hadn’t been invented, how would I have managed to pay the bills this month, and what would I be doing differently in relation to my spending?”.
It is a very dangerous activity to use a credit card to get by at present as providers are starting to identify people using their cards to shop for essentials and are reducing limits and in some cases withdrawing cards if they think the customer is getting badly out of shape. They are also actively cutting credit limits and withdrawing unused cards.
Leaving aside the rights and wrongs of putting essentials on credit cards my advice is to try and wean yourself off the habit, even making some life-changing decisions if necessary to try and live within your means. In the coming recession I strongly recommend curtailing your borrowing wherever possible and try not to rely on credit to buy anything you can’t repay when the bill comes in.
I think a lot of it depends on the situation. When many people are just starting out in life, they may not have an emergency fund in place or have a lot of savings. In this case, credit cards can be used as a last resort for emergencies. They are much better than using payday loans to make ends meet.
The important thing is that people only use credit cards to get by for true emergencies – food (not fast food or restaurants), car repairs, plane tickets for a family emergency, etc. The problem comes when people think they NEED to use credit cards to get by and end up using them for expensive clothes, jewelry, or other luxury items.
Steve Rhode – A personal finance blogger and founder of the Myvesta Foundation, a global social enterprise that helps people find solutions for money troubles. You can ask Steve your debt related question through GetOutOfDebt.org and he’ll help you for free.
Ouch! Not much good happens from using credit and creating debt when there is no reasonable expectation that you will be able to repay it. It only leads to bigger problems down the road unless you win the lottery or find a windfall of money to pay off the debt.
It might not be a smart thing to do but I can certainly understand how some might find it a necessary thing to do. I remember right after hurricane Katrina hit New Orleans and slaughtered that area. People were without homes, without food, without jobs and without hope. People used their credit cards to buy diapers, pay for a hotel room or pay for food.
And being in that same situation, with a hungry child looking up at me, I can’t say that I would not do the same thing in that situation. That does not make it right but maybe desperate times call for desperate actions.
Abusing a credit card may be necessary but there will be consequences to pay latter. Those consequences could include bill collectors, bad credit report, a bad credit score, threats of lawsuits, being sued, wage garnishments, etc.
When someone tells me that they had to use their credit card to continue to get by when not faced with an unusual life emergency, well then that’s a clear sign that we need to come face-to-face with the reality of the situation and deal with it.
Using a credit card to make ends meet at the end of the month, month-after-month, or using once credit card to pay another is critically dangerous to your financial health. What will happen soon enough is that the denial about the financial situation will soon get stuck on the tracks and be broadsided by the powerful and fast moving freight train of reality. That’s painful. You need to take action and get off the tracks before that happens.
J. Money – You’ll enjoy the blog Budgets Are Sexy for a look inside the life of one blogger and how money impacts it.
I think “Wow, they must have REALLY been in a sucky situation!” I’m more of a positive thinker, so I tend to give people the benefit of the doubt from the get-go. I bet most of the time the people confuse NEEDS with WANTS, but that usually pops in my mind later if i’m giving it more thought.
There is nothing with with putting NEEDS on your credit card to get by – this is life, and it’s not always perfect. If you need food or shelter, and have absolutely no money in the bank, then you’re pretty much out of luck. It also depends on the timeframe we’re talking about here. If we’re talking about a few years here, then obviously there are some other ways to get your hands on money – loans, friends, etc. But i see no problem w/ loading up the card for a few months and then working to pay it off as quick as possible.
I personally put everything I personally can on a credit card to manage my budget. It gives me 30 free days, ya know? I pay it off in full each month, but worst case scenario you rack up a little interest when needed. That’s what it all comes down to really – the needs vs wants.
Dawn – Iowa Hippie Chick blogs about money love and marriage and offers so very insightful posts on personal finance that involve emotional insight and awareness. Visit her blog.
What goes through my mind
- Is they don’t have a grip on their personal finances.
- They probably don’t have a spending plan/budget.
- They definitely don’t have an emergency fund.
- And they just aren’t getting real with themselves, about their own money!
- I don’t think it is a smart thing to do, at all.
- It just dig’s their debt hole deeper, compounding their problems.
- Solution = Emergency Fund!
It is what it is. Some people are deeply into debt. I suspect that some people use their cards as a last resort. When someone tells me that they HAD to use the card, I ask how that actually transpired. Did they always use cards to supplement their income? Did they start using the card recklessly and then end up in a hole? For the most part, most people don’t have to use their cards to get by — at least not initially. It’s only after they’ve started loading up on debt, and can’t keep up, that they usually have to turn to credit cards to make ends meet.
Your second question is much easier to answer. If you can’t afford to pay your credit card bills in full each month, you should stay away from cards. You’ll eventually get buried if you can’t pay your card in full each month. Most of the people I’ve run into — who ran into trouble with cards — typically carried balances from month to month. Carrying balances, especially ones that continue to rise, is also not good for your FICO score. Higher utilization translates into lower scores. I’ve written extensively about the virtues of paying in full.
Using a credit card, when you can’t afford to pay the balance off each month, is not smart.