Your clothes dryer cranks out its last turn, or an old friend invites you to visit her for a spontaneous weekend getaway. You really don't have the cash on hand, but the balances are your credit cards are near zero. Do you dare charge it?
Although it's best to draw from your savings for emergency expenditures, sometimes it can make sense to pull out the plastic and carry a balance temporarily — but only if you do it wisely.
Follow these eight tips to prevent that temporary safety net from turning into a downward spiral of debt.
1. Think before you spend
In some cases, it's easy to make the decision to pay with a credit card and pay interest. For example: Your car breaks down, your fridge is on the fritz or you have a medical emergency.
“That's honestly what we think credit cards are for,” says Linda Sherry, director of national priorities for Consumer Action. She adds that it's usually wealthy consumers who can always afford to pay their balance in full.
In other scenarios, though, the decision might be harder. You want a bigger flat-screen TV, for example, or a weekend in the mountains. If you do decide to use credit, try to limit yourself to paying off one purchase in full before making another, Sherry recommends.
2. Choose your card carefully.
Choosing the right card for the job of carrying a balance helps ensure you'll be able to pay it off.
- Use a low-interest credit card. Even if you make regular purchases with a higher-interest rewards card that you pay off each month, it's smart to keep a low-interest credit cardin your wallet just in case, Sherry says.”Keep one clean card to purchase items you basically want to pay for in installments,” she says.
- Look for a 0 percent deal. If your credit is good and you can find a card with a 0 percent introductory rate, it might make sense to open a new card before making a large purchase (and carrying a balance), Sherry says. But try to avoid retail cards (which often boast 0 percent financing for pricey goods such as furniture and electronics), Sherry recommends. “Store cards can be tricky,” she says, noting that customers who slip up could end up getting hit with high fees and retroactive interest dating back to the date of purchase.
- Consider a card that rewards you for revolving balances. Bank of America offers the BankAmericard Better Balance Rewards card, which comes with an annual APR range of 11.99 percent to 21.99 percent, and is currently offering 0 percent interest for a year. The card is designed for consumers who carry a balance. It gives you a small incentive (“up to $100 a year”) for paying more than your minimum payment on time every month. So basically, you'll get $25 cash back every quarter that you've paid on time each month, even if you carry a balance. That reward, although it's small, can win you back some of what you'll pay in interest charges.
3. Don't mingle the balance you carry with your regular spending.
Do you make regular purchases, such as groceries and clothing, on a credit card that you pay off each month? If so, don't mix that spending in with the balance you're paying down, Sherry recommends. You have two options for keeping these types of spending separate, she says. You could use two separate cards, or you could use a Chase card with the Blueprint feature that allows you to separate purchases by category. The feature is available on a variety of Chase cards, including Slate from Chase, Chase Freedom (both of which have a 0 percent introductory APR for 15 months) and Chase Sapphire (which has an APR of 15.99 percent).
“You can say, 'OK, I want my grocery and pharmacy purchases, or whatever category, to be paid in full every month,'” she says. “Interest only gets added to the balance you're revolving.”
4. Protect your credit score.
Carrying a balance doesn't have to hurt your credit score, says Anthony Sprauve, senior consumer credit specialist for myFICO.com. “Carrying a balance is fine,” he says, but you should take several steps to keep the debt from adversely affecting your score:
- Watch the size of your balance. Carrying a high balance will hurt your FICO score, Sprauve says. However, even if you are carrying a small balance, making on-time payments of at least the minimum will keep it afloat. So try to keep your balance at less than 30 percent of your total available revolving credit, which includes all your credit cards and lines of credit, Sprauve says. In some cases, it might make sense to open another card to increase your overall available credit. But if you do have to temporarily max out your only card on a purchase, don't worry too much. “As the balance steadily comes down — to 75 percent [of your credit limit], then 50 percent, then 25 percent, it will slowly bring you score back up,” Sprauve says.
- Consider splitting your purchase among multiple cards. Having two cards with $500 balances and $1,000 credit limits would be slightly better for your score than maxing out one of the cards and having a zero balance on the other, Sprauve says.
- Keep in mind that carrying balances on too many cards can hurt your credit by making you seem financially overextended, Sprauve says. Although having a few cards with balances is fine, “It's when you start to have10-plus that it could be a problem,” he says.
5. Create a repayment plan
Create a household budget and figure out how much you can put toward your balance each month. “Play around with an online credit card payoff calculator,” Sherry says, adding that you should determine the total amount of interest you'll pay if, for example, you pay off the balance in three months versus six months.
6. Automate your payments
If you can, set up automatic bill pay through your bank for a set amount each month — preferably on payday, Sprauve recommends. Or, set up an alert to remind yourself to pay the bill.
“That's the joy of technology,” Sprauve says. “There are all kinds of tools so you don't have to remember on your own.”
Just make sure that whatever amount you pay each month, it's at least the minimum amount due to avoid hurting your credit score.
7. If you make a mistake, keep trying
If you do make a late payment or make an impulse purchase that drives up your balance, don't give up and resign yourself to having a heap of debt, Sprauve says. Instead, just get back on track right away.
“It's kind of like if you're on a diet and you have a cheeseburger one night,” he says. “You don't say, 'Oh, well, I'm going to always have cheeseburgers for every meal now.' You get back up and restart your progress.”
8. Zero out your balance
Before you make your last payment, call your credit card issuer and ask for the payoff amount, Sherry says. After you make your payment, check to make sure you owe nothing, she says. Otherwise, a concept called residual interest (the small amount of interest that accrues between the time the bill was sent and the moment you paid it) could come into play.
“You might have a tiny bit of interest dangling there,” Sherry says. “. You might think it's paid off, then get dinged with a late fee” if you ignore it.