The COVID-19 pandemic has caused financial hardships for many Americans. Some of you may have had your hours cut or even lost your job. Because of these recent trends, I’ve been advising consumers to hang on to every penny and to avoid using credit cards during the COVID-19 crisis.
And guess what? You did a great job! The Bureau of Economic Analysis reported that in April, Americans were hunkered down in their homes and saved 33% of their disposable income. That is amazing, and I hope it helped many of you make headway toward a healthy emergency fund.
Some Americans are even starting to see their finances stabilize a little. If you’re one of them, you might be starting to think about home improvement projects or getting a new smart TV for all the streaming services you recently subscribed to.
Stop right there! Before you start watching a shopping channel again while clutching your credit card, I want you to implement a few rules. According to Bloomberg, a second wave of job losses could happen before we’re finished with the pandemic. So don’t suddenly ramp up your spending.
You still want to save money, but if your personal economy is humming along nicely now, it’s OK to start slowly living your life again. But do it in small steps and make sure you internalize all five of the following rules for using credit cards during a crisis.
Rule No. 1: Check Your Credit Score
If your credit score is still pretty high, then that’s wonderful. But if your score dropped during the past few months, it’s likely a situation you couldn’t avoid, especially if you were surviving on a reduced income.
In 2008 and 2009, the Great Recession destroyed a lot of consumers’ credit scores. Many with excellent scores back then fell on hard financial times and watched the value of their homes drop. In October 2009, the unemployment rate hit 10.2%.
FICO did a survey in 2011 to examine changes in credit scores between 2006 and 2011. The group whose scores had dropped more than 150 points during that period were called “fallen angels.” This term was used because the consumers had angelic scores and then fell from grace due to the economy.
Now, fast forward to 2020 and the COVID-19 crisis. In May, unemployment was at 13.3%. Some Americans are suddenly finding themselves in the fallen angels category due to a reduced income and an inability to meet monthly expenses.
If you’re one of the fallen angels who is now seeing your finances return to a healthier state, do what you can to boost your score before you start spending again. A low credit score could lead to higher insurance premiums and interest rate increases on your credit cards. So obtain a healthy score again before you start using your credit cards for nonessential expenses.
Rule No. 2: Check Your Credit Reports
Get your free annual credit report, and review it for errors. This is a quick credit score booster if you find an error that affects your score. This is a quick credit score booster if you find an error that affects your score. Use the proper procedures for disputing an item, and if you win the dispute, your score should improve.
You’re also looking for fraud on your credit reports. Unfortunately, fraudsters take advantage of a crisis, so you need to be on the lookout. If you see an account on your report that you didn’t open, then this is a sign of identity theft. Check all three of your credit reports and notify the bureaus that have the fraudulent account listed. You can get more details about what steps to take on the identity theft page at USA.gov.
Rule No. 3: Chip Away at Your Credit Card Debt
You can have a great credit score and still have debt. The key is making sure the utilization ratio on each credit card is below 30% (if possible, keeping it under 10% will really boost your score). To calculate your ratio, divide the amount of debt you have by the total of your credit limits. The score algorithm will calculate the ratio for each credit card as well as the overall ratio for your credit cards combined.
As your debt drops below a 30% utilization ratio, your score will begin to rise. This assumes, of course, that you’re paying your bills on time. If your debt is huge and the interest is piling up more debt, then consider a debt consolidation loan to pay it off at a lower rate. The bonus is that your utilization ratio on your credit cards will drop because you’re moving the balances to a loan. So this could increase your credit score.
Rule No. 4: Use Contactless Payment Methods
Contactless credit cards have been around for years, though consumers have been slow to adapt to a new payment method. But now, with the pandemic, Americans are warming up to a payment option that avoids having other people touch your cards.
A Mastercard study showed that between February 2020 and March 2020, contactless transactions grew twice as fast as noncontactless transactions in the grocery and drug store categories. Remember February? We were just getting used to the idea that we needed to be careful around other people.
The Mastercard study also showed that 79% of consumers say they use contactless payments due to coronavirus-related safety issues. Almost three-fourths of consumers in the study stated that they will continue to use contactless payments even after the pandemic is no longer a present danger.
Try it a few times, and you’ll get comfortable with it. These days, it’s always safer if you can avoid having anyone else touch your credit cards.
Rule No. 5: Update Your Budget
You know all that disposable income you’ve saved? Before you automatically start spending money again, reconsider how you’ve spent money on discretionary expenses in the past.
The bottom line? Don’t start spending on things you didn’t miss when you were on a tight budget. For instance, maybe you discovered the joy of walking outside, and you don’t want to go back to the gym. Review your nonessential spending, and decide if some of these things can permanently be removed from your budget.
It’s even a good idea to have a separate budget for nonessential spending. You want to make sure you know where your money’s going. The way you spend your money is the way you’re spending your life.