Credit Card Habits During the Pandemic

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Credit Card Habits During the Pandemic

In our six-month reflection, we talked about how the pandemic has changed our spending behavior. For instance, we’ve noticed anecdotally that we’re spending less on travel and entertainment, understandably; instead, our discretionary income is increasingly going toward improving the creature comforts of our homes. Now, Money and Morning Consult’s new survey gives us insight into our credit card behavior with data.

Americans’ Credit Card Habits During the Pandemic

The good news is that over half of those surveyed said that they’ve put money toward a debt as a direct result of the pandemic, or plan to in the future.

But even though Americans are decreasing their balances, there’s a lot of anxiety around it; 25% of Americans said credit card debt is a source of daily stress. The high interest rates that credit cards carry is likely one of the main stressors.

With money worries on everyone’s minds, we wanted to answer common questions about credit cards: 

FAQ about Credit Cards

What is a common credit mistake?

A common mistake is relying too much on credit cards. It’s tempting to bridge any gaps between your income and expenses with a credit card. But because most cards have interest rates over 20%, if you aren’t able to pay off your balance in full every month, your debt can snowball out of control quickly.

How can people avoid relying on credit cards too much? 

If you’re on a tight budget, use them only for fixed, recurring expenses, and pay off the balance every month.

Doing this has a positive impact on the two most significant factors of your credit score: payment history and how much of your credit limit you utilize. This will get your credit into good shape should you eventually decide to buy a car or home, and won’t put you in danger of incurring a mountain of debt.

How can people recover from using their credit card too much? 

Seek credit counseling. Through close examination of your cash flow, credit card balances and interest rates, a counselor can help you identify the best strategy to handle your debt. Most credit counseling agencies are nonprofit organizations that offer free phone appointments. Find an agency near you by visiting www.nfcc.org/locator.

Can closing a credit card affect your credit score?

There are two reasons why closing your credit card can affect your credit standing.

First and foremost, one of the biggest factors on your credit score (second only to payment history) is your amount of available credit — in other words, how much you could spend until you hit your credit limit. And it’s good for your credit score to have a lot of available credit.

For example, if your credit limit is $10,000, and you typically keep your balance around $3,000, your available credit is around $7,000. If you were to pay off that balance, your available credit would increase to $10,000, and you might see your score slightly improve. However, if you close your card, you’d then be decreasing your available credit to $0 — and that will negatively impact your score.

Of course, the impact of closing one account also depends on the other open credit accounts you have. If you were to close a card that has a much lower limit compared to your other accounts, the impact on your score might be negligible. But there is another factor to consider: length of credit history. 

The age of your accounts is the next biggest factor on your credit score, and typically the longer the account history, the better it is for your score.

Let’s say you’re 50 years old, and you decide to close that old credit card that you opened back when you were 18. Unfortunately, your credit score is probably going to suffer as a result — even if you hadn’t used that card in several years — because it was one of your oldest accounts.

Keeping your credit cards open doesn’t mean you have to use them, of course. If your credit score is important to you, you can simply keep your unused credit cards somewhere safe and (more or less) forget about them. Some credit card companies may close the account if it’s been awhile since you’ve used it, so you may want to get in the habit of charging a small purchase to that card once or twice a year. But otherwise, you can stop using those cards and still benefit from the available credit they’re providing you with.

That said, your credit score isn’t everything. If the card comes with high annual fees, or if having lots of available credit makes you feel tempted to overspend, that open credit card probably does more harm than good. Closing the card might hurt your score temporarily, but in some situations, it could be better for your overall financial picture.

Financial Planning with The Humphreys Group

Want to learn more about credit card best practices? Check out Part 1 and Part 2 of our series from last year, “Mid-Year Wellness: The Credit Vs. Debit Debate.”