5 lessons I learned from relying on credit cards while I was unemployed

Elizabeth Aldrich

Apr 4, 2020, 23:17 IST

5 lessons I learned from relying on credit cards while I was unemployed

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In 2015, I was unemployed for six months and underemployed for another year. During that time, I relied heavily on credit cards to cover my basic necessities.
If I could go back, I would make sure I had a low-interest or intro-APR credit card going into unemployment, and I would try harder to keep my spending under control.
I'm glad I took advantage of balance transfers to pay off my credit card debt, and I'm also glad I went into unemployment with high credit limits to ensure my credit score didn't suffer too much as I racked up debt.
See Business Insider's list of the best credit cards with introductory APR offers.

A few years ago, I quit my job and ended up unemployed for six months and underemployed for almost another year as I built up a career as a freelancer. I blew through my savings in the first three or four months.

For the year or so that followed, I relied on a combination of income from side gigs and my credit cards to cover my living expenses. Here are some important lessons I learned.

1. A small difference in interest rates can make a big difference in your bill

I had a handful of credit cards going into unemployment, and mainly used three to cover expenses: one from First Tech Federal Credit Union with a moderate interest rate, and two travel rewards credit cards with high interest rates.

In the beginning, I made purchases with all three credit cards. However, I quickly realized that an APR difference of even a few percentage points made a significant difference in how much I ended up spending on interest each month.

I could have saved hundreds of dollars by relying primarily on the credit card with the lowest-interest rate. Even better, if I'd applied for a low-interest credit card while I was still employed and kept it on hand in case of emergency, I might have saved even more money.

2. Credit cards with an intro APR can act as an emergency fund

Some credit cards come with introductory offers that give you a 0% APR on purchases for a certain period of time. These offers can last anywhere from a few months to 18 months or more.

Looking back, I wish I would have taken advantage of these offers. I could have applied for one before quitting my job, and that way, I would've been able to rely on credit cards during my period of unemployment without having to pay interest fees.

However, the introductory period does end, and once that happens, the ongoing APR you're charged is typically pretty high. It's not wise to use these credit cards if they tempt you to spend more or rack up a balance because if you can't pay off that balance before the introductory period ends, you could end up spending even more on interest.

Rather, these cards can act as a back-up emergency fund if you either don't have one or end up draining yours. They should only be used as a last resort for purchases that are absolutely necessary.

3. Balance transfer offers can save you a lot of money on interest - if you use them wisely

I did take advantage of balance transfer credit cards to help me pay off the debt I accumulated while I was unemployed.

First, I opened the Chase Slate® credit card because it offers a 15-month 0% APR introductory period with no balance transfer fee (after 15 months, a variable APR of 14.99% to 23.74%). I transferred all of my credit card debt to the Chase Slate and set up automatic monthly payments, but I still wasn't able to pay it all off before the introductory period ended.

After the 15 months ended, I applied for another balance transfer credit card: the Citi Simplicity® Card. It offers a 0% intro APR on balance transfers for 21 months (then a variable APR of 14.74% to 24.74%) - you just have to complete your balance transfer in the first four months from account opening. At the time, it had a 3% balance transfer fee, but that's since increased to 5%. The long introductory period was what I needed to pay off my debt once and for all.

Unfortunately, I wasn't approved for a high enough credit limit to transfer all of my debt, so I was only able to transfer about half of it and had to continue paying interest on the other half. This is always a possibility to be aware of, as is the possibility that you might not be approved for a balance transfer credit card at all. For this reason, if you do make use of a balance transfer offer, it's wise to pay off your balance in full before the introductory period ends.

4. Paying off your debt on time and keeping a low debt-to-credit ratio is crucial to protecting your credit score

Thankfully, I never reached a point where I didn't have the money to make my minimum required credit card payment. This alone helped me maintain a decent credit score, even while I maxed out some of my accounts. Paying your credit card bill on time is arguably the most important thing you can do to protect your credit.

My credit score did take a slight hit due to the high balances I had on a couple of my credit cards. It could have been a lot worse, though.

One thing that helped me keep my debt-to-credit ratio under control was the fact that I went into unemployment with a lot of credit cards, several of which had pretty high credit limits. The ratio of your overall debt to overall credit limit should ideally remain below 30% - mine crept up beyond that, but it never went above 50%.

What's more, as soon as I started paying down those balances aggressively and stopped putting new purchases on my credit cards, my score climbed back up pretty quickly.

5. Being debt-free is ideal, but sometimes debt is inevitable

Once my freelancing career stabilized, I focused all my financial efforts toward paying off the credit card debt I'd accumulated, which reached close to $10,000. I cut my fixed costs down as much as possible and funneled most of my income toward paying off those balances.

Once I was finally debt-free, it felt like a weight had been lifted. I'd never felt more financially secure - or freer to do whatever I wanted with my life.

That being said, some of the debt I accumulated was necessary. While I probably could have done a better job of keeping my spending under control at times, I also don't know how I would have covered necessities like food and housing during the rougher months of self-employment if I didn't have a decent credit card on hand.

Credit cards come with high interest rates, and they aren't ideal for covering emergency situations. It's important to consider all of your options, which may also include drawing on a savings account, borrowing from friends and family, or taking out a personal loan with a lower interest rate.

However, if you do have to rely on a credit card for a little bit while you get your feet back on the ground, do so wisely.

Citi Citi Simplicity® Card

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