The coronavirus pandemic’s impact on consumer finances has led many Americans to rethink their money habits. For example, according to NerdWallet’s annual Consumer Credit Card Report, 19% of credit card holders say card issuers cut their credit limits during the pandemic — and almost all of those people (93%) say their financial views or strategies changed because of it.
The vaccine rollout is allowing people to move away from their pandemic routines, but that doesn’t have to mean returning to pre-pandemic habits. Some money lessons are worth holding on to. Here are five credit card habits to consider keeping even as the masks start to come off.
1. Building or maintaining a dedicated emergency fund
At first glance, this may not seem like a credit card habit, but consider: Of the millions of Americans who saw their credit limits get cut during the pandemic, a quarter of them (25%) say they weren’t able to cover an emergency that came up during that time because of it. Credit card issuers can reduce your limits for any reason — even if you didn’t do anything “wrong” — so available credit isn’t a reliable substitute for savings.
Experts recommend that you have an emergency fund with enough money to cover three to six months’ worth of expenses. But even a starter fund of $500 or $1,000 can make a difference. If you’re just beginning, aim to establish a starter emergency fund quickly — perhaps by cutting back expenses for a few months or making minimum payments on outstanding debts — and then set up automatic contributions toward your ultimate goal.
Emergency funds need to be safe and easily accessible, so it’s best to keep the money in a savings account. Interest rates are at historic lows right now, so even the highest-paying account won’t earn much interest. But the main purpose of an emergency fund isn’t supposed to be its income-producing potential. It’s insurance — a resource to lean on if something urgent comes up.
2. Keeping cards active so they aren’t closed
One of the most important factors in your credit score is credit utilization, or the percentage of available credit you’re using. A reduced credit limit can translate into higher utilization — and a lower score.
For example, if you have a credit limit of $10,000 and a balance of $3,000, your utilization is 30%. If your limit is suddenly cut in half to $5,000, your utilization jumps to 60%. The lower your utilization, the better for your credit score. That may help explain why 29% of cardholders who experienced a credit card limit decrease say their credit score went down as a result. And while utilization has no “memory” — the damage to your score lasts only as long as utilization remains high — the effect can keep you from accessing new credit right when you need it most.
Utilization is measured both on a per-card basis and across all your accounts, so having a card account closed for inactivity can have a big impact on utilization, too. All the available credit in that account disappears, which means existing balances make up a bigger percentage of your total credit limit. One way to mitigate this risk is by making sure your existing credit card accounts remain open. If you don’t use a card for a long time, the issuer may close the account without notice. Use the card once a month to keep it active — perhaps by putting a small recurring expense on it, like a subscription.
3. Keeping utilization down
Speaking of credit utilization, keep it as low as you reasonably can, both for your credit score and in order to more easily withstand financial crises. The survey shows that of cardholders whose credit limits were reduced during the pandemic, 30% plan to make more than one credit card payment per month to keep their balances low. You can also consider other methods of lowering your credit utilization.
There is a potential drawback to this: If issuers choose to decrease limits en masse again, they may cut the limits of those who aren’t using much of their available credit. Still, keeping a low balance is good for your credit score, and if you’re carrying a balance from month to month, it also means you’re paying less in interest. Paired with an emergency fund, it’s likely worth the risk of a potential future limit decrease.
4. Balancing debt payoff and saving
Of Americans who experienced reduced credit limits during the pandemic, 27% decided to pay down their balances sooner than they originally planned because of it. Accelerating your debt payments can save you a lot of money: U.S. households that carry credit card debt pay more than $1,000 a year in credit card interest, according to NerdWallet’s annual household debt study.
That said, aggressively paying down debt shouldn’t take complete precedence over saving for emergencies. You don’t necessarily need to hit your emergency fund goal of three to six months of expenses before attacking debt — particularly high-interest debt — but aim to have some cash on hand before prioritizing your card balances. Money in an emergency fund is money you don’t have to try to borrow if disaster strikes.
5. Knowing your relief options, and their potential downsides
As incomes were disrupted during the pandemic, many cardholders enrolled in hardship assistance programs offered by their issuers. These programs can provide temporary help like reduced or deferred payments, waived late fees or reduced or waived interest payments. Most of those who tried to enroll in hardship programs at the beginning of the pandemic were accepted, according to last year’s Consumer Credit Card Report, but a large majority of them faced some sort of consequence for doing so, including reduced credit limits.
This doesn’t mean that you shouldn’t ask for help if you need it. But it’s important to go into a hardship program knowing the risks, in order to evaluate your other options in comparison. If you don’t have a better option, absolutely reach out to your issuer for assistance. But if you can tap your savings or ask a family member for help, you can avoid the pitfalls that commonly accompany hardship programs.