How to Handle Credit Cards During Times of Inflation | Credit Cards

In the face of 40-year highs in inflation numbers, American consumers are turning to credit cards at an accelerated pace.

According to the credit bureau Equifax, consumers opened 28.4% more credit cards in the first quarter of 2022 compared with the same period the previous year. What’s more, the Federal Reserve Bank of New York found that credit card balances increased by 13% from the second quarter of 2021 to the same period in 2022, the biggest year-over-year increase in more than 20 years.

If you’ve noticed that your spending has increased with rising prices and you’re concerned about taking on credit card debt, here’s what you should know. There’s good news, too: If you’re using your credit card responsibly, the right card can help you ease inflation’s bite.

How Credit Card Debt Can Exacerbate Inflation Problems

Credit cards can provide valuable benefits to their users, and if you’re experiencing financial difficulties, they can help you keep up with your necessities until you’re back on your feet.

But it’s easy for things to get out of hand with credit card debt, particularly if you’re already struggling with higher costs across the board. “The increased use of credit cards likely means that people are feeling the pinch of higher prices and using credit cards as a way to make ends meet,” says Thomas Tunstall, senior director of research at the University of Texas at San Antonio’s Institute for Economic Development.

And if you’re not careful, it can make your situation worse. Here are some of the ways that credit card debt can damage your financial health:

  • High interest rates. Credit cards carry relatively high interest rates, with an average of 16.65%, according to the Federal Reserve. What’s more, credit card interest rates are usually variable, which poses an additional danger. “Rising costs are typically associated with higher interest rates, as the Fed raises its benchmark target,” says Tunstall. “This means that the interest rates for credit card debt are likely to rise, thus increasing the cost of any outstanding debt.”
  • Minimum monthly payments. Because credit cards have minimum monthly payments with no structured repayment plan, your balance can balloon quickly if you’re paying the lowest amount required every month.
  • No more grace period. Credit cards typically offer a grace period between your statement date and due date every month. During this time, you can pay off your balance in full and avoid interest charges. However, if you carry a balance from one month to the next, you lose your grace period, which means that interest starts accruing on the date of the transaction.
  • Impact on your credit score. As your credit card balances grow, so does your credit utilization rate, which is one of the most influential factors in determining your FICO credit score. Higher utilization rates are correlated with lower credit scores.

How to Leverage Your Credit Cards to Combat Inflation

If you’re not relying heavily on credit cards to deal with inflation, you may be able to use your cards to combat higher prices instead.

  • Tap your cash back. Many credit cards offer cash back rewards on your purchases, which you can use to help pay down your balance – in fact, most cash back credit cards allow you to request direct statement credits on your account.
  • Bonus rewards can help. Some credit cards offer higher rewards rates on certain purchases. Shop around for rewards credit cards that offer accelerated rewards rates on everyday spending categories, such as groceries, gas, streaming subscriptions or dining out. Just be sure that you’re not spending money you can’t afford to pay back just to earn rewards – the card’s interest rate will always outpace the rewards rate.
  • Open a new card with a low intro rate. If you have credit card debt or you need to make a large purchase soon, you may consider a card that offers an introductory 0% annual percentage rate. Depending on the card, you may be able to secure a 0% APR on purchases, balance transfers or both, with promotional periods ranging from 12 to 21 months. While these cards don’t reduce your debt burden, they can make it easier to bear as you pay it down interest-free.

Jay Zigmont, a certified financial planner and founder of Childfree Wealth, stresses the importance of understanding the terms of any 0% APR card, including the transfer fees it charges, which are typically 3% to 5% of the balance you’re moving over. “Only use a 0% card if you are 100% sure you can pay it off in the time period,” he says. “Don’t play credit card roulette with 0% APR cards, as you will get caught.”

How to Avoid Taking on Too Much Credit Card Debt

If your budget was already tight before the recent spike in prices, your options may be limited. “If you were living paycheck to paycheck and then inflation hits, you either have to make hard choices or put it on a credit card,” says Zigmont.

But many consumers may have access to different ways to cut their costs and limit their reliance on credit cards to get by. Potential approaches include:

  • Reviewing your budget and cutting back on discretionary spending, such as eating out, entertainment and other unnecessary expenses.
  • Canceling unused subscriptions.
  • Cutting back on services, such as meal and grocery delivery apps, that charge extra for something you can do yourself.
  • Shopping around for car insurance to ensure you’re getting the lowest rate.
  • Avoiding using credit cards for every purchase to minimize debt-powered spending.
  • Making multiple credit card payments every month to keep your balances and, therefore, your utilization rate, low. 
  • Looking for ways to cut back on spending through coupons, deals, cash back apps and more.

Steps to Deal With Credit Card Debt

If you’ve already racked up some credit card debt due to rising costs, or you had credit card balances before the inflation rate spiked, there are some steps you can take to improve your debt situation:

  • Stop using your credit card. If you’re trying to pay down credit card debt, using your cards for new purchases can make you feel like you’re barely making progress. Think about switching to a debit card or cash for a time to focus on eliminating your debt.
  • Cut back on expenses. If possible, cut back on some of your discretionary spending so you can afford to put more toward your monthly payments.
  • Look into consolidation. Consolidating your debt with a balance transfer credit card, personal loan or other option could be worth it if you have good credit and can take advantage of lower interest rates. Carefully research each debt consolidation option to determine whether it’s right for you.
  • Look into credit counseling. If your credit isn’t in good shape and your debt payments are unaffordable, a credit counselor may be able to help you through a debt management plan. For modest fees, these plans allow you to pay off your debt over three to five years, often with lower payments and interest rates.
  • Consider other approaches. If your situation is dire and you’re already behind on payments, you may consider debt settlement or even bankruptcy as a last resort. Note, however, that these options can damage your credit score significantly, so it’s crucial that you carefully consider all of your options and consult with a credit counselor or bankruptcy attorney before proceeding.

While lingering high inflation degrades your spending power, the right credit card strategy can make a difference. It’s critical that you take the time to research and evaluate each approach carefully to determine which one is best for you, your current situation and your financial goals.

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