7 Cases When It's Ok To
Carry A Credit Card Balance
by Erin Peterson
No reputable personal finance expert will recommend routinely
carrying a big balance on a credit card. It's expensive, it can
damage your credit and it can encourage you to spend more than
Nonetheless, in a rocky economic climate, sometimes carrying a
balance isn't as poisonous as the alternatives, says Eric Tyson,
author of a personal finance book and founder of EricTyson.com.
"During bad economic times -- and even during good ones -- there
are occasions when tapping the credit feature on a credit card
can make sense," he says.
That's not to say there aren't caveats: any time you carry a
balance, you're taking a risk, says Liz Weston, author of "Your
Credit Score" and personal finance columnist at MSN Money. "If
you have a balance, you're subject to the whims of the credit
card company. They can change almost any rate or term with very
little notice," she says. "You're always playing with fire when
you carry a balance, but in this economy, you're playing with
hand grenades that somebody pulled the pin on."
Here are a few times when carrying a balance may be a reasonable
thing to do.
1. Your only other alternative is a payday loan. Think your
credit card terms are onerous? Then you'll be even more appalled
at those set forth by payday loan companies, whose fees, if
annualized, can be 200 percent interest or more. "Payday loans
are usually very expensive," says Tyson. "People who are really
pinched for funds will generally find that credit cards offer
more attractive terms than that of a payday loan."
2. You're using the balance as part of a broader financial plan.
Perhaps you've got to make a several-thousand dollar purchase,
and you're wary of drawing your savings account dramatically at
once. You may reasonably decide to pay it off over a few months,
says Sandra Shore, senior counsel at Novadebt, a New Jersey based
credit counseling service. "If you've got the money in your
account if you need it, then using your card this way is a money-
management strategy," she says. There is a cost to this strategy,
but it can provide peace of mind for those who don't want to
drain their savings account for a major purchase.
3. You suspect you'll soon be facing bankruptcy. Weston says it
may seem counter-intuitive for people to pile up debt on a credit
card when they're in serious financial trouble, but it may be a
financially savvy move. "People want to be responsible and pay
off their card, but if they're going to wind up in bankruptcy
court anyway, the smart thing to do is to conserve your cash,"
she says, "because your debts could be erased in bankruptcy."
Be very careful with this, though. If you are certain you'll be
filing, then running up credit card debt could result in the debt
not being discharged -- or even fraud charges against you. "This
underscores why it's so important to talk to a bankruptcy
attorney as soon as you suspect bankruptcy might be an option,"
says Weston. "He or she can advise you about how to handle your
4. You're starting a business. With bank loans drying up, and
Small Business Administration-backed loans slowing to a trickle,
credit cards are now the most common source of financing for
America's small-business owners. According to a National Small
Business Association survey, 44 percent of small-business owners
identified credit cards as a source of financing that their
company had used in the previous 12 months. That's more than any
other source of financing, including business earnings. By
contrast, in 1993, only 16 percent of small-business owners
identified credit cards as a source of funding they had used in
the preceding 12 months.
"It's not easy to get a bank loan -- especially if you have an
unproven or start-up business," says Tyson. "But if people shop
around and find a credit card with a low interest rate, borrowing
for business purposes can be worth considering."
5. You're dealing with short-term unemployment or cash-flow
crunch. Weston pays off her credit cards each month, but when she
had a three-month gap between jobs a few years ago, she used her
credit card instead of depleting her savings. "When you're
unemployed or have a cash crunch, sometimes the smart thing to do
is conserve your cash and just pay the minimums," she says. The
same is true for contractors who do the bulk of their business in
a single season and have to ride out the slow times -- but still
expect to have cash coming in the near future.
6. The math works in your favor. On occasion (though less
frequently in this economy), you'll have a better deal on your
savings account than the terms on your credit card. In these
circumstances, you can use this spread to your advantage, says
Shore. "If you're buying furniture, they're offering no finance
charges, your credit card rate is locked in at 3 percent, and
you're getting 4 percent on your savings, then it might be okay,"
says Shore. It's easy for this plan to go awry, she cautions, so
pay even closer attention to your bills to make sure no terms
change. Oftentimes, the money you'll be saving is so minimal that
it's not worth the hassle, but it remains an option.
7. You're facing a true emergency. Many people first get a credit
card only for use in an emergency, says Weston, but soon find
that the "emergency" is a Macy's sale. If something catastrophic
happens -- you lose your job, you have a major medical emergency
or your furnace goes on the fritz in the dead of winter, you may
end up putting (and keeping) a balance on your card. But make
sure you create a plan to dig out of debt, fast. "People want to
be optimistic, they want to think they'll get a low-rate balance
transfer credit card offer," Weston says. "But they're fooling
themselves if they don't think there will be consequences."