The COVID-19 crisis is causing disruptions and uncertainty for millions of Americans’ lives, and according to recent survey data, the crisis is causing many Americans to rack up additional credit card debt. Even people who are still employed are using credit more than they were before. This crisis is shining a spotlight on the financial precariousness of many Americans, who were often living paycheck to paycheck even before the pandemic hit.
According to a recent survey, Americans are relying more heavily on credit cards to manage their finances during a time of emergency:
70% of people who have lost their job because of coronavirus are taking on more credit card debt than they had planned
Among people whose work hours have been cut, over 60% are using credit cards more
Among people whose job has not been affected by the crisis so far, 37% are relying on credit cards more than before.
Credit cards can be a great way to manage your monthly cash flow, earn rewards points or finance big purchases. But when people are having to rely on credit cards for paying everyday living expenses, that’s a sign of trouble for their finances.
The COVID-19 crisis is causing damage to the economy and to people’s livelihoods. Try not to let it cause a personal financial crisis by taking on too much credit card debt.
Here are a few key insights and tips to keep in mind when considering whether to use credit cards or cash during this uncertain time.
Too Many Households Have Too Much Debt
According to the U.S. Federal Reserve Bank of New York, as of the 4th quarter of 2019, total U.S. household debt increased to $14.15 trillion. During the last three months of 2019, credit card balances increased by $46 billion, reaching total credit card debt of $930 billion.
How much credit card debt is too much? One sign of trouble is the level of delinquencies in credit card accounts: the percentage of borrowers who are 90 days or more behind on their credit card payments. According to a December 2019 report from TransUnion, even before this crisis, the credit industry was projecting that 2020 would see an increase in credit card delinquency rates.
When the economy hits a downturn, consumers who are already struggling to pay their credit card bills are likely to be vulnerable to additional economic stress. These credit card delinquency rates are likely to rise now that many Americans are unemployed and struggling to pay their bills.
Many Americans Were Already Living Paycheck to Paycheck
Another sign of stress in the American consumer economy is the number of households who, even before this economic downturn, were already living paycheck to paycheck. A September 2019 survey from the American Payroll Association found that 74% of Americans said it would be “somewhat or very difficult” to meet their financial obligations if their paycheck was delayed by a single week.
Another 2019 survey from Charles Schwab found that 59% of Americans live paycheck to paycheck, 44% carry a credit card balance and only 38% had established an emergency fund.
No matter how you define “living paycheck to paycheck,” it’s a troubling sign that even during some of the best years of economic growth with the highest-performing stock market in U.S. history, so many Americans were struggling to save money or have anything left of their paycheck at the end of the month.
When people struggle to save and when people can’t make ends meet on their current income, they are more likely to tap into credit cards to pay bills. Credit cards are worthwhile financial tools if used properly in the short-term, and if the balances can be paid off promptly without racking up too much (or any) interest. But millions of Americans have been using credit cards as a source of emergency funds and everyday spending.
Living on credit cards might have seemed sustainable for many people during the days of low unemployment and strong consumer confidence. But now that the economy has taken a turn for the worse, credit card debt could easily damage your long-term financial future. It’s time for millions of Americans to reevaluate their relationship with credit cards.
What to Do With Your Credit Cards Now
During uncertain economic times, people react in various ways. Some people shift into extreme frugality mode, and shut down all non-essential spending. Some people might want to comfort themselves by splurging on a few fun things or big purchases. Whatever your situation, if you have already lost your job, had your work hours cut, or even if you’re still working full-time but feel uncertain about your job security, this is a good occasion to cut down on your spending.
Depending on how much credit card debt you have, there are a few possible steps to improve your financial situation.
No Credit Card Debt
Even if you have zero credit card debt, this uncertain economic situation is a good time to avoid putting more purchases on your credit card. Don’t use your credit card right now unless you are earning rewards points and you have a plan to pay off your balance on time, without incurring interest charges or late fees.
Some Credit Card Debt, Not Delinquent
If you are carrying a balance on your credit cards, but are current on your payments and your job is still going on as usual, you can keep using your card as usual. Even if you feel good about your job security, this could be a good opportunity to stop using your credit card for everything; stop putting additional purchases on the card until you’ve paid off your balance in full.
If your job situation is uncertain or money is tight, you might want to consider a few months of making only the minimum payment on your credit card. This will cause you to rack up additional interest charges, but making the minimum payment will help you conserve cash while also preventing your credit score from taking a hit. Another option is to consider a 0% APR credit card for a balance transfer.
Try to avoid a situation where you fail to make the minimum payment on time, because this can hurt your credit score and lead to other problems in your finances.