While leaning too heavily on credit while out of work can cause you to rack up debt, access to credit during unemployment might set you up for a healthier financial future. Job-hunters with a credit line equal to at least 10 percent of their previous yearly salary can afford to take up to three weeks longer to find employment, making them less likely to settle for a lower paying or a part-time job with few or no benefits, according to a 2016 paper from the National Bureau of Economic Research.
Even so, access to credit doesn’t mean you should use it freely while out of work.
“It’s a slippery slope that could extend the financial pain of your unemployment months or years beyond the actual period of being out of work,” says Kelley Long, a CPA and certified financial planner at Financial Finesse. “Use credit cards as a last resort to keep the lights on and a roof over your head, but otherwise try to stick to cash until you’re back to work.”
If you find yourself in a situation where you need to use credit, do so wisely by following these tips:
1. Know your numbers
Look at your monthly unemployment benefits plus any other income and create a plan. First add up your monthly fixed expenses, like rent, utilities and cellphone, cutting them if you can, says financial coach Avraham Byers. Subtract monthly fixed expenses from monthly income.
If you’re lucky, there will be a surplus and you can divide the amount left over by the number of days in the month to get your “magic number,” Byers says. That’s the amount you can spend daily on variable expenses, such as groceries, gas and restaurant meals, without going into the red. If your income doesn’t or barely meets your fixed expenses, formulate an emergency plan for unemployment that might include using the local food bank and moving in with family. If you plan to incur debt to get by, crunch your numbers to calculate how much you’ll accrue, Byers says.
2. Check your interest rates
Check your interest rates – Prepare for the possibility that you might need to use credit by checking the interest rates on your cards. In a best-case scenario, you’ve got a low-interest credit card with a high credit limit in your wallet. Make a mental note to reach for that card first, and avoid grabbing the fancy rewards card with the high interest rate. Interest rates too high? Unemployment might not be the best time to apply for new credit, blogger Kevin Mulligan points out on the personal finance blog Free from Broke. But, as long as your accounts are in good standing, you can call your issuers to ask for a lower rate, says Byers, who negotiated a lower rate on a card once when he saw a financial crunch in his future.
3. Cut stealth recurring charges
You may have gotten so used to seeing charges for $9.99 here, and $7.99 there, that you barely notice them when you scan your monthly statement.
“Recurring charges like Netflix, Spotify or your gym membership may seem small, but they add up,” Long says. “Try to pause or cancel as many of these charges as possible to preserve what cash you do have for the things you absolutely need like groceries and utilities.”
Here’s a tip: the free service Trim will scour your bills to help you find and cancel these charges. If you’re in a contract, call the company to see if they allow a freeze of your membership during periods of unemployment, Long recommends. Most do, she says.
4. Do it, don’t charge it
When you were working full time, you might have fallen into the habit of paying for certain services because you were so busy. But now that you have more time than money, consider going DIY — and definitely don’t pay for these services on credit.
“While you’re out of work, try to make it a policy not to spend money on anything you can do yourself like washing your car, ironing your dress shirts or doing your nails,” Long says.
5. Use plastic carefully in a pinch
Turn to your emergency savings first if you can. But don’t be afraid to pull out your card to make a purchase that’s essential to your wellbeing, health or job prospects. For example, your bank account is empty and so is your fridge. Or, the only suit you own is in tatters and you need a new one for job interviews, Byers says. Just don’t use the job hunt to rationalize springing for a whole new wardrobe or getting your hair professionally blown out for an interview.
“Be honest with yourself about what you really need,” he says.
6. Avoid stress-spending on credit
Yes, unemployment is a very stressful time, so it may be tempting to reach for plastic to go on an online shopping spree or meet your friend at the outlet mall. But don’t do it.
“Recognize that a new thing, whether it’s clothing, a gadget or an accessory, will not alleviate your stress,” Long says.
An experience may, however, so make bargains with yourself. When cash was tight, Long used to walk or ride her bike rather than paying for a bus or cab. Her reward: one take-out meal per week.
“It was a luxury at the time and so enjoyable, but it didn’t lead to long-term financial pain,” she says.
7. Be OK with paying the minimum
If you use credit cards to pay for necessities while you’re unemployed, make sure you’ll be able to swing the minimum payment each month, and consider paying only that amount.
“If the reason you have to use your credit card in the first place is because you don’t have cash to make ends meet while you’re not working, then yes, it makes sense to just pay the minimums,” Long says.
While that’s normally a bad approach that can keep you in debt for decades, a period of unemployment can be an exception to that rule.
“Just don’t let those low payments lull you into feeling comfortable running up balances on unnecessary purchases,” Long says.
Finally, keep the end in sight, so you’re less likely to feel deprived, overwhelmed and stressed, which can lead to the urge to spend.
“This is just temporary, it’s not permanent, and things will turn around,” Byers says.