When times are tough, credit card debt can be inevitable as you learn to manage your credit or are forced to make risky financial decisions due to hardship.
For Alabama residents Lydia Sen and her husband, that was their reality during the Great Recession of 2008 after she lost her job and he took a pay cut. They relied on credit cards to get by and racked up about $14,000 in debt.
“In 2014, we got paid off and decided to just not use credit cards until 2019,” says Sen, who documents her financial journey on her YouTube channel. “We don’t want to accumulate high-interest debt, so we’re very strategic and intentional about our credit card use.”
Having a plan can help you avoid debt or keep it manageable when money is tight. If your circumstances allow, consider alternatives before making credit card mistakes that make repayment difficult.
1. Don’t keep spending as usual
Change your budget if inflation or other circumstances threaten it. With today’s inflation in mind, Sen adjusted her budget to include rising gas costs and her credit card internet and cell phone bills.
“Look at the budget and take a hard look at those needs versus wants,” says Kathy Bosler, quality assurance specialist at GreenPath, a nonprofit credit counseling agency.
Senn’s grocery bill went from $125 a week for a family of six to $225. Cutting this bill is not an option as her husband has lupus and requires an autoimmune diet. “It’s the difference between him thriving and being in pain every day,” Sen says.
To balance rising costs, it cut back in other areas and opted for alternatives. Weekly family get-togethers at a local coffee shop have moved to her patio. Now the family dines out and travels less, and the kids attend a less expensive art camp.
When you’re looking at your credit card statement, consider canceling unnecessary purchases or unused subscriptions. Prioritize essentials like rent, utilities, food, and expenses that help generate income. If you’re still struggling financially after making the changes, consider other options, such as a gig, part-time job or finding roommates, Bosler says.
2. Avoid relying on your credit limit
Cutting back on your budget can provide savings that keep you from relying on credit cards. Save what you can—even as little as $5 a week. The emergency fund is reliable, but the credit limit may eventually reach the maximum value or be reduced at the discretion of the issuer.
Before this happens, ask the issuers for a higher credit limit if the accounts are in good standing. So you have some last resort loan to top up your emergency fund. Note that the issuer may run “a difficult investigation» on your credit after this inquiry, an action that can temporarily lower your credit scores.
3. Don’t carry a high interest credit card balance
Carrying a large balance on a high-interest credit card makes shopping more expensive. According to the Federal Reserve, in 2021 the average rate was 16.45%. Interest rates on some credit cards are even higher – 29.99%.
While a card’s interest rate depends on economic factors and your credit, some cards or institutions offer lower rates that can save you money on current balances. For example, according to the National Credit Union Administration, the national average credit card interest rate at credit unions in March 2022 was 11.21%.
If you need a debt repayment strategy, a good credit score (FICO score of 690 or higher) may qualify you for credit card balance transfer which allows you to move a high-interest balance to a new card at a lower rate. Weigh the cost of the balance transfer fee and the ongoing interest to determine the best option. The ideal balance transfer card has no annual fee, a low balance transfer fee of 3% or less, and a 0% APR long enough to make progress toward paying off your debt.
4. Stop collecting late fees
If you suspect a late payment, contact your credit card issuer immediately. According to a 2022 press release from the Consumer Financial Protection Bureau, late fees could cost up to $30 the first time and up to $41 after that.
Some issuers may change your repayment term, offer financial hardship programs, or refer you to a nonprofit credit counseling agency that provides debt management plan, according to Bossler. These programs may waive fees or lower interest rates for a period of time.
5. Think twice about cash advances
A credit card cash advance conveniently provides a short-term cash loan from a bank or ATM, but it’s expensive. Interest on borrowed money begins to accrue immediately and fees may apply.
Instead, consider a personal loan or targeted offers from issuers that turn an affordable credit card loan into a less expensive installment loan that puts cash into your bank account. The latter option does not require a loan application or credit check.
This article was written by NerdWallet and originally published by The Associated Press.
The article 5 Credit Card Mistakes to Avoid in Hard Times originally appeared on NerdWallet.