Should You Pay Off Credit Card Debt During a Recession?

5 min read
woman holding open her wallet full of credit cards

No one knows exactly how long America's coronavirus recession will last—or how much worse it could get. But we do know that this is a unique period for our nation’s economy, and not all industries have been impacted by COVID-19, and the related recession, in the same way. While millions have lost their jobs, millions more are nervously wondering what will come next. Should they keep reaching for financial goals and pay off debt, or put it all on hold?

It may be a good idea to pay off debt during a recession, particularly high-rate credit card debt that quickly accrues interest. However, it depends on your overall financial health and job stability. Here’s what to consider—and how to put your plan into action.

Assess Your Current Financial Situation

Before you decide how to approach your credit card debt; first review your end of year financial checklist and take time to revise your budget—or create a budget if you don’t have one—based on your current circumstances.

There’s a good chance your finances and lifestyle have changed as the result of the pandemic and recession, perhaps resulting in poor financial health. For example, you may be spending less on travel or going out, or you're living on one income, but need to set more money aside for utilities and groceries.

Even if you don’t plan on sticking with budgeting long term, make an initial assessment of your minimum monthly expenses, monthly income, and cash savings. With irregular income budgeting the goal is to determine how much extra money you have each month, and how long your savings will last if you lose your income.

If you keep up with budgeting and tracking your monthly expenses, you may also be able to identify ways to cut back and save (e.g., could you be paying less for your auto loan?). You’ll then have more money you can use to grow your savings or pay down debt.

When to Save Money Rather Than Pay Down Credit Card Debt

When you don’t have a lot of savings and feel like you’re in a precarious financial situation, you may want to focus on building an emergency fund before paying off credit card debt - this is an important financial health tip.

You will still want to make at least the minimum payments on all your credit cards to avoid late payment fees and hurting your credit. And, depending on your budget, you might be able to put a little extra toward the card with the highest interest rate. However, the primary goal is to create liquid (i.e., easily accessed) savings that you can use for housing, average monthly car payments, food, transportation, and other necessities.

While most experts recommend saving at least six months’ worth of expenses in your emergency fund, take some time to consider what is right for you right now. If you feel your job is very secure, it may make sense to save a little less before you move on to paying credit card debt or using the debt snowball method. If you aren’t sure about your income, you may want to save more. Budgets and savings are fluid, the key is having a plan that works for you.

When Paying Off Credit Cards Could Be Best

On the other hand, if you’re financially secure, you can put extra money toward paying off your credit card debt regardless of whether we’re in a recession and use this credit utilization calculator to help you. Doing so can save you money on interest, and clear away the mental burden that comes with credit card debt.

Paying off credit cards may also improve your credit scores and lower your debt-to-income ratio, which could make it easier to qualify for other types of financing with favorable terms. This can be particularly helpful during a recession, when interest rates are low and you may be able to save money by refinancing your mortgage, auto loan, or other debts.

Tactical Ways to Handle Credit Card Debt

Whether you’re focused on how to start saving money or paying off debt during the recession, you can benefit from a strategic approach to dealing with your credit cards. Two popular options are using a balance transfer credit card or balance transfer loan.

A balance transfer credit card comes with a promotional 0% annual percentage rate on balances you transfer to the card. The promotional rate can save you money during the promotional period, which generally lasts nine to 18 months. However, it may be difficult to qualify for a large credit limit, you may have to pay balance transfer fees, and the standard interest rate will apply to the balance after the promotional period ends.

While many personal loans or emergency loans have origination fees and don’t offer a 0% promotional APR, they can be cheaper than using a balance transfer offer if you need more than 18 months to pay off the debt. Consolidating multiple credit card debts with a balance transfer personal loan can also help you save hundreds of dollars over the course of your loan, freeing up money for other necessities.1 And, a balance transfer personal loan can improve your credit score—on average, many LendingClub members see a 10-point increase in their credit score.2

What If You Can’t Afford All Your Bills?

Debt-payoff tactics might seem impractical when you’re struggling to afford minimum payments on your bills while keeping up with day-to-day expenses. However, if you find yourself having to pick and choose which bills to pay, try to reach out to your creditors before you miss a payment.

Many credit card companies (along with other creditors and insurance companies) are offering financial assistance in response to the coronavirus pandemic. They may allow you to miss a few payments without incurring fees or hurting your credit. Or, the company may offer to temporarily lower your interest rate or payment amount.

You can also reach out to a nonprofit credit counseling agency if you want help from a third party. Trained credit counselors can help review your finances and offer personalized advice for various types of debts. The services are often free, or have a low cost that may be waived based on your income. If you’re struggling with credit card debt, counselors can even negotiate with your creditors and may be able to get on a more affordable monthly payment plan with a debt management plan.

The Bottom Line

Figuring out whether it’s best to build your savings or pay down credit card debt can be particularly difficult in the midst of a recession, especially when uncertainty and fear may creep into your decision-making process. However, while a recession impacts multiple industries, it affects everyone’s personal finances differently.

If the recession is hurting your finances, reach out to creditors to understand your options and focus on building your cash savings. But if you can weather the recession without a problem, or even thrive because you work in an industry with high demand, get started paying off debt creatively  now to put yourself in a better position for the recovery.

  1. Many LendingClub members save an average of nearly $900 over the course of their balance transfer personal loan.

  2. Average LendingClub member credit score increase of 10 points considers the average change in credit score for balance transfer eligible members three months after issuance, comparing 66,366 members who were presented with and chose a balance transfer loan offer to 19,366 members who were presented with a cash loan offer from 07/01/2018–12/31/2018. If a customer increases their credit card balances after their loan is issued, they may not experience a higher credit score.

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