How to use your credit card to solve financial emergencies

Millions of Americans are unemployed as businesses shut down to lower the spread of the coronavirus, prompting many people to dip into their savings.

Other workers are furloughed indefinitely and are relying on unemployment funds to pay some of their bills.

Unexpected medical bills and auto repairs can impact household budgets. Using your credit cards during financial emergencies can be a stop-gap measure and help you avoid borrowing from your retirement funds such as your 401(k) plan or IRA.

Here are some ways to use your credit cards during a financial emergency:

Opening a balance transfer credit card with 0% introductory APR

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When looking at balance transfers, ensure you understand all the fine print regarding the offer, said Jim Triggs, CEO of Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization.

“Be sure to understand what happens if you don’t pay off the balance completely by the time the introductory period expires,” he said. “Lastly, is there an annual fee for the card you are opening? One has to take all of those factors into account to determine if opening a new account and transferring a balance is right for you.”

Utilize credit card rewards

The rewards perks and points accumulated from your reward credit card can be used to purchase everyday necessities such as groceries, restaurant delivery or to get cash back on your existing balance.

Before you use the rewards, learn about the details and the specific rewards programs — like cashback rewards — you're signed up for. Utilizing airline points or travel credits means more money is available for essential purchases such as food or bills such as your student loan.

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Holding a balance on cards/paying the minimum until you’re financially stable

While accruing debt can be nerve-wracking, focus on short-term goals until you are working full-time again.

Consumers who are struggling and only able to pay their minimum required payment every month, they should “at least do that so long as they can still afford their basic living expenses,” Triggs said. “This will at least keep you current with your creditors. Slowly pay down your debt and protect your FICO credit score from major deterioration if you can.”

People facing hardships can ask for a temporary payment deferment that allows them to skip payments without penalty, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Credit utilization: Using available credit to pay emergency bills

Credit utilization is the relationship between the amount you owe and your credit limit. The closer your balance gets to your credit limit, the higher your utilization ratio, said McClary. Experts recommend that your balance not exceed 30 percent of your spending limit since higher balances can lower your credit score.

A balance of $100 on a credit card that has a $1,000 credit limit means the credit utilization is at 10 percent. Lenders want to see low credit utilization ratios because it indicates that the cardholder is using credit responsibly.

“People with high credit limits and low balances may have not room to use credit in an emergency without running up a high credit utilization ratio,” he said.

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Contacting lenders should be the first step that borrowers take when they are trying to resolve a financial emergency. You can ask to waive a late fee or change the payment date if you cannot make your payment, said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief.

“Even if you end up making a late payment, it's not usually a big deal if it's a one-time event,” she said.

Be sure to shop for the best possible terms. Most online personal loan lenders will provide you with pre-approval without impacting your FICO score with a hard credit inquiry.

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Often personal loans can have lower interest rates than credit card interest rates, Triggs said. The payment is fixed, so the payment amount does not change from month to month.

“Fixed payments will help to ensure the loan is paid off within the term of the loan, which is usually between 12 and 60 months,” he said.