How Credit Cards Can Help (or Hurt) During an Economic Crisis

Credit cards are something of a double-edged sword, in that they can help or hurt you, depending on the circumstances surrounding their usage.

They’re a wonderful tool for building credit as well as financing large purchases, which is often the only way buyers can reasonably afford big-ticket items without saving up. They can help tide people over during economic hard times too, like the national economic crisis that has arisen in the wake of the COVID-19 pandemic.

However, credit cards can also serve as the gateway to persistent financial woes, thanks to their high average interest rates and endlessly revolving nature — which may allow cardholders to amass debt that takes years to pay off, or even requires them to file for bankruptcy if things get too dire.

Here is more on how credit cards can help or hurt during times of financial trouble, and how to minimize the ill effects of credit card debt once you have it.

The Upsides to Using Credit During a Crisis

One particularly tempting aspect of buying on credit is the opportunity to earn cash-back rewards. Basically, the line of thinking is this: If you’re going to spend money anyway, you might as well earn money or other valuable rewards for doing so. It’s important to be aware that using this as an excuse to spend can leave you paying more in interest than you’re earning back in rewards, though.

Coming out ahead on a credit card offer means using the account carefully, paying at least the minimum amount due each month (preferably more) and ensuring you’re actually reaping those rewards.

The same principle applies for earning sign-up bonuses on new cards or opening a new card with a zero-percent APR introductory period between six and 20 months. Be sure to understand all of the terms before signing on the dotted line, but there’s no denying the fact that getting a break from interest can help consumers find their footing when money’s tight. Those funds can go instead toward essential living expenses like housing and food.

The Downsides to Using Credit During a Crisis

While credit cards can help consumers keep their heads above water and earn rewards during times of trouble, they can also become overwhelming quickly. Relying too heavily on credit cards can help in the short term while hurting your financial health in the long term, according to many experts.

So, use credit judiciously rather than as a substitute for budgeting or building your emergency fund and trying to increase your income wherever possible.

If you do find yourself bogged down with seemingly endless credit card debt during or after a crisis, explore your options for getting rid of it. One alternative to bankruptcy, which by the way can haunt your credit report for seven to 10 years, is debt settlement through programs like Freedom Debt Relief. This strategy aims to negotiate down what you owe, since creditors are often willing to accept partial payment if the alternative seems to be getting nothing at all.

The earlier you meet with a not-for-profit credit counselor, the sooner you’ll get personalized advice on budgeting and managing debt. These appointments are typically an hour in length and, best of all, are usually free. The counselor may recommend trying a debt management plan (DMP) as an option, which means you’d make payments to the agency instead of your creditors directly. DMPs can help certain consumers earn interest and fee reductions.

Whether credit cards help or hurt during an economic downturn depends on their terms and how they’re used. Cardholders can absolutely reap benefits from maximizing rewards and minimizing interest and use credit cards to pay for life essentials during hardship. But credit cards can also pave the way for costly interest to grow and credit scores to drop, too.

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