Could your credit cards bail you out during a recession?

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The quick answer? Yes – but at a cost.

Key points

  • Financial experts have been issuing recession warnings for months.
  • It’s better to have savings to get through a downturn than to rely on credit cards.
  • Carrying over a credit card balance can impact your ability to borrow and hamper your recovery from a recession.

Is a recession hit in 2023? Many financial experts seem convinced that we are due to a short-term economic downturn. Worse still, some even say that a coming recession could be prolonged.

Why all these terrible warnings? The Federal Reserve is desperate to calm inflation and has therefore implemented a series of aggressive interest rate hikes. And it’s not over raising rates either.

In the meantime, these rate hikes are making it more expensive for consumers to borrow, whether in the form of a Personal loan, car loan or credit card balance. And as the cost of borrowing becomes prohibitive, the fear is that consumers will start spending less, setting the stage for a recession sometime in the new year.

If you fear a recession, you may be wondering if your credit card can serve as a personal safety net in the event of job loss. The answer? They could. But that’s not the best idea.

The credit card debt problem

Let’s say you lose your job during a recession and your unemployment benefits leaving you short of $1,000 each month to pay your bills (remember, these benefits will only replace part of your missing paycheck). If you have a bunch of credit cards with a total spending limit of $10,000, you can assume you’re good for several months. You can bill those $1,000 of expenses each month you are out of work until you find a job.

But this approach is dangerous for several reasons. First, each time you carry over a credit card balance, you accrue interest on that balance. And if you charge a storm in the absence of a paycheck, the amount of credit card interest you end up accumulating could be astronomical.

Also, remember what we talked about earlier – borrowing rates are on the rise right now. And so it’s really not the right time to start hoarding credit card debt.

In addition, a credit card balance that is too high could cause damage to your credit score. And that’s not a good thing, because a lower credit rating could make it difficult to borrow money when needed.

It’s better to have savings

Although your credit cards may seem like a good fallback option in a recession, it’s even better to have a emergency fund at your disposal. Ideally, you should aim to have enough money in savings to cover a minimum of three full months of living expenses. And for even better protection, aim for six months of spending or more.

Your credit cards could end up bailing you out if a recession hits. But that doesn’t make it a good option in this regard. In fact, resorting to credit cards could hamper your personal financial recovery after a recession. Rather than going through this period and moving on, you could find yourself with a balance over your head for years to come. And frankly, you deserve better.

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