Did you know that 2 out of 10 Americans are using their credit cards to pay for basic necessities? According to an article published on CreditCards.com, 20% of employees who participated in the 2015 Employee Financial Wellness Survey have admitted to this. While the study showed that this already decreased compared to the results from previous surveys (33%), it is still a number that is worth noting.
The survey revealed that 33% of employees are still having a difficult time meeting their household expenses. 47% are still carrying a balance on their cards to the next month – making them pay for the high interest rate. 26% of those carrying a balance on their cards have a hard time meeting the minimum payment of their credit accounts.
All of these statistics are lower compared to previous surveys – meaning things have improved for a lot of employees. However, you cannot ignore the fact that there is still a big percentage of people who are struggling with their credit cards. This is because they are using their cards to pay for their basic necessities.
But is it really correct to assume that those who use their card to pay for their debt is someone who is not a smart credit card user? That is not entirely true. Sometimes, there is a good side to using your cards. In fact, there are a couple of instances when it is okay to use credit cards for basic necessities.
When is it okay to use credit for basic expenses?
There are credit card uses that are actually smart. Some people may think that this is impossible given the fact that they have high-interest rates. How can any purchase done with a credit card ever be good?
Believe it or not, there are two situations when credit cards are actually good for your personal finances – at least if you know how to use it to your advantage.
When you need to build up your credit score.
The first situation that will make using credit cards to buy basic necessities is when you need to build up your credit score. We all know how important this score is. It can help us get a low-interest rate on loans that we will apply for in the future. Not only that, it can give us a good financial reputation. When you have a good credit score, it shows that you have a good credit behavior. That means you are responsible enough to pay off your credit obligations diligently.
Now the question is, how does paying your basic necessities through credit cards come into play?
To have a good credit score, we need to have good entries in our credit report. This report is where all our credit behavior is recorded. If you do not use credit, there will be nothing to record in this report. Using your credit card is the fastest and easiest way to keep on using credit. Personal loans require an application. With a card, you do not have to keep on applying to use credit. As long as you have a credit limit, you can continue using your cards for your purchases.
The next question that you need to ask is why you should to use it for basic necessities?
This is simple. Even the most frugal budget plans will allocate a amount for the essential purchases in their household. That means if you use your credit card to purchase basic necessities, you should be able to pay everything that you used in cash once the billing statement arrives. Your budget allocation should keep you from carrying over a balance in your card each month. This way, you can avoid the high interest rate that can make your balance bigger than it should be.
When the rewards program of your credit card can save you money.
Another situation that makes it okay to use credit cards to pay for basic necessities is when you have great rewards on that card. Take note that this should be rewards that you can use. If not, then your rewards points will just go to waste.
There are many types of rewards cards. You have a card that will allow you to earn miles if you purchase your airline tickets with credit. There is a rewards card that will let you get rebates when you use it to buy gas. And then there is the more popular cash back rewards card that will allow you to get a percentage of your purchase back in cash. The last one is the most common of them all.
Make sure that when you choose a rewards card, you need to ensure that it is something that you can really benefit from – at least, with regards to your spending preferences. For most people, the cash-back rewards card is the best option for them. When they use this card to pay for basic necessities, they can get around 2% off – all the time. This is a great way to save money. As long as you pay the balance in full each month, you can benefit from this cash discount.
Here is a video from Money Talks News that provides tips on how you can use the rewards on your credit cards to your advantage.
When is it not okay to use your card for basic necessities?
While there are instances when using your credit cards for basic necessities is okay, there are also specific situations when it is not okay. We have two situations in mind.
When you cannot pay it off at the end of each month.
Regardless if you need to raise your credit score or you can benefit from the rewards on your card, you should not use the card if you cannot pay your balance in full. According to a study done by the National Foundation for Credit Counseling, 1 out of 3 Americans carry over their balance each month. The data published on NFCC.org revealed that an average of $2,500 in debt is being rolled over their accounts – at least, this is true for 11% of the survey participants. While it will not put you immediately in a financial crisis, it will lead you there. First of all, you will be wasting money because the balance will accrue the high interest rate of your card. If you are using your rewards card, it will practically make the discount useless. The 2% cash back reward, for instance, is nothing compared to the high interest of your card. The only way that you can avoid the damage that will be caused by your high interest credit cards is by paying it off at the end of the month. If you cannot do this, then do not use it.
When there is no other way to pay for basic necessities.
Another situation when you should never use your credit card for basic necessities is when you are doing it because your cash is not enough to pay for them. When this is your situation, that means you cannot pay it off in full at the end of the month. If you keep on doing this without changing anything about your spending, then you will soon find yourself with a balance that you cannot afford to pay anymore. According to an article published on FutureMoneyTrends.com, 70% of consumers in 2011 were relying on their cards to purchase basic necessities. This was a mere 3 years after the Great Recession started. The lack of cash forced them to pay off what they need by being in debt. We all know that this led to further financial problems. It only solved the problem of today but made things worse for their future.
If this is your current situation, you need to stop using your credit cards. Immediately. Do not make things worse. But what can you do to put food on the table? Be creative and improvise. Shop in cheap stores. Stop spending on things that do not matter. If you have to downsize your house or your whole lifestyle, then that is what you should do. Debt is not the solution if you do not have a concrete plan to pay it off.
Think about these situations before you decide to pay off your basic necessities using your credit cards.