Could Your Credit Cards Bail You Out During a Recession?

The quick answer? Yes -- but at a cost.

Will a recession hit in 2023? Many financial experts seem convinced that we're due for a near-term economic downturn. Worse yet, some are even saying that an upcoming recession could end up being a prolonged one.

Why all the dire warnings? The Federal Reserve has been desperate to cool inflation, and so it's implemented a series of aggressive interest rate hikes. And it's not done raising rates, either.

Meanwhile, those rate hikes are making it more expensive for consumers to borrow, whether in the form of a personal loan, auto loan, or credit card balance. And as borrowing becomes cost-prohibitive, the fear is that consumers will start to spend less, thereby setting the stage for a recession at some point during the new year.

If you're worried about a recession, you may be wondering whether your credit cards can serve as your personal safety net in the event that you lose your job. The answer? They could. But that's not the best idea.

The problem with credit card debt

Let's say you lose your job during a recession and your unemployment benefits leave you short $1,000 every month to pay your bills (remember, those benefits will only replace a portion of your missing paycheck). If you have a bunch of credit cards with a total spending limit of $10,000, then you might assume you're good for a number of months. You can charge that $1,000 in expenses each month you're out of work until you find a job again.

But that approach is dangerous for a couple of reasons. First, any time you carry a credit card balance forward, you accrue interest on that balance. And if you're charging up a storm in the absence of a paycheck, the amount of credit card interest you end up accumulating could be astronomical.

Plus, don't forget what we talked about earlier -- borrowing rates are up right now. And so now's really not a great time to start racking up credit card debt.

Also, too high a credit card balance could cause damage to your credit score. And that's not a good thing, because a credit score drop could make it difficult to borrow money should that need arise.

It's better to have savings

Although your credit cards might seem like a good fallback option during a recession, an even better bet is to have an emergency fund at your disposal. Ideally, you should aim to have enough money in savings to cover a minimum of three full months of living expenses. And for even better protection, aim for six months' worth of expenses or more.

Your credit cards could end up bailing you out if a recession strikes. But that doesn't make them a good option in that regard. In fact, falling back on credit cards could hinder your personal financial recovery from a recession. Rather than get through that period and move on, you could end up having a balance hang over your head for years on end. And frankly, you deserve better.