The folly of relying on credit to save your fiscal butt

I’ve long advocated building up an emergency fund and/or “rainy day fund” if at all possible, to help get through hard times if and when they arrive.  However, I know many people who’ve dismissed that advice.  They’ve said they simply can’t afford to do that on their income, so they’ll rely on credit cards and other debt instruments to cover expenses if something goes wrong.

Well, they’re now running headlong into the reality of the financial markets.  A lot of them are finding that the credit lines they’d planned on using are either less than they’d expected, or aren’t available at all.  For a start, credit card issuers are reducing their exposure to potentially bad debt.  Everyone except those with stellar credit ratings and history is at risk.

A new survey has found that about 25% of card owners in the US had their limits reduced or accounts closed within the past 30 days.

Almost 50 million people saw their credit limits decreased or cards closed involuntarily, according to a CompareCards survey conducted in late April.

There’s more at the link.  Bold, underlined text is my emphasis.

To make matters worse, credit limits on credit cards can be adjusted by their issuers without specifically notifying card-holders.  Your only notice will be the changed credit limit printed on your monthly statement – and many don’t read those in any detail.  That means you could find yourself suddenly maxed out on your credit card, without any prior awareness of that risk.

That new wariness by lenders is extending even to secured debt such as mortgages and home equity lines of credit (HELOC’s).

Over the past month, lenders have put in place higher credit-score and down payment requirements, and in some cases stopped issuing certain types of loans altogether, in effect shutting down a large swath of the mortgage market … The impact has been dramatic, with one model showing mortgage credit availability has plunged by more than 25% since the U.S. outbreak of the virus.

. . .

JPMorgan Chase & Co. tightened its standards last month, requiring borrowers to have minimum credit scores of 700 and to make down payments of 20% of the home price on most mortgages, including refinances if the bank didn’t already manage the loan.

Wells Fargo & Co. increased its minimum credit score to 680 for government loans that it buys from smaller lenders before aggregating them into mortgage bonds.

The banks’ revised standards are far above the typical minimum score of 580 and down payment of 3.5% that borrowers need to qualify for home-buying programs supported by the federal government.

Wells Fargo is no longer letting borrowers refinance their mortgages while cashing out home equity, and both Wells and JPMorgan have suspended new home-equity lines of credit.

Again, more at the link.

That’s potentially very bad news indeed if you were relying on a HELOC, or planning to cash out some of your equity in your home, to get you through the present crisis.  For example, if you own more than 50% equity in your home (i.e. the outstanding balance on your mortgage is less than 50% of your home’s current market value), you might have planned to draw on that in a financial emergency (such as many of us are facing in these difficult times).  However, now you won’t be allowed to access that equity through a HELOC.  That’s going to put a big crimp in some people’s ability to cope.

I’ve even heard from some friends that their existing, pre-approved HELOC’s have been “frozen” or suspended at their present levels.  For example, they may have been approved for a $25,000 HELOC, but they’re only using, say, $12,000 of that facility.  Now they’re finding that they can no longer access the remaining balance of the credit they’d already arranged.  That’s proving to be a huge financial headache for them.  I know a few who are applying for second mortgages, with different lenders, to make up the sudden shortfall – but that’s costing them a lot more in fees and higher interest rates.  Worse, in the present economic climate, sometimes second mortgages are simply not available.

One can’t blame lenders for seeking to protect themselves, but if you rely on credit to make ends meet from month to month, that doesn’t help you at all.  As I’ve said so often in the past (for just one example, see here), get out of debt if at all possible, and stay that way!  That’s investing in your own future, in the best possible way.  Also, build up some sort of emergency fund as soon as possible.  In fact, I’d go so far as to suggest, if possible, using your government coronavirus stimulus checks to start such a fund, rather than using them to pay off debt or cover other needs.  If you have no emergency financial “cushion” at all, that’ll be a whole lot better than nothing.

Some people have told me that they haven’t bothered to build up their own emergency “nest egg” because they’ll be eligible for unemployment, or some other form of social welfare or entitlement program, if they’re laid off or their employer goes bankrupt.  Er . . . not so fast.

People in many states, including New JerseyMaine, and Pennsylvania report they haven’t yet gotten a dime from unemployment. In fact, a whopping 71% of jobless Americans haven’t gotten their unemployment payments from March.  Lines at food banks are literally miles long in some areas.

Without a nest egg, and with your usual credit facilities now circumscribed, you may find yourself in the same boat – unless you have something set aside for a rainy day.

If you’re still doubtful about the need (or possibility of saving) for an emergency fund, see Aesop’s latest.  Scroll down to point #3, and read it.  Slowly and carefully.  Yes, he’s talking to you.  Then, go back and read the entire article.  He makes good sense, and underlines everything I’ve had to say on the subject for the past twelve years or so on this blog.



  1. Yup. I’ve seen friends and relatives needing to keep working long past when they planned to retire because of this too.

    Sometimes, the difference between a small annoyance and a major problem is just having the cash on hand to deal with it. Anything you can solve with money isn’t really a problem – if you have the money.

    And if you’re living paycheck to paycheck it only needs a minor hiccup to cause everything to collapse.

    Yes, it’s easier said than done. But even a thousand dollar emergency fund can keep a minor problem from overwhelming you.

  2. A friend keeps a few credit cards in a drawer that have no annual fee in case he needed the credit for an emergency. The whole system now seems turned on its head, as fewer people have or use cash. And banks being banks will pull in the reins of lending if it seems they will lose, as only makes sense from a business standpoint.

    This virus business is killing more than people, and in more ways than one.

  3. Peter,

    Much of what we have done is right our of your preparedness

    For us credit is for either long term purchase as in home, car and other seriously major stuff. Paid them off before retirement.

    When it comes to a home buy what you can afford, even when dire
    events happen like one or the other goes unemployed. The
    MacMansion often comes with the MacMassive mortgage. Keep
    the dream of a home but avoid the nightmare of supersizing debt.

    Build a war chest of several months pay level. Use plastic
    to avoid handling money or on line. Note I said plastic,
    not credit. If a credit card is used its paid off fully
    that month. Their interest rates even now are plain nuts.

    Keep a pantry well stocked as when the panic hits the price
    of food and other items go up. Its basic frugality, buy cheap
    now, save for later. Its important when TP is worth more
    than a barrel of oil.

    After doing that for many many decades the house is fully paid
    so the bills are taxes (property licenses and the like), heat, electric water/sewer. Food is also managed. Eating is a good
    thing but paying too much for it is wasteful of the budget.
    Then the extras like cable/internet. We plan and execute the
    plan and while we have met the enemy the plan has been sound,
    we still adjust it to maintain status as needed. We aren't
    rich, just prepared. We did learn from our depression parents.

    Credit is always money at cost. If the cost is low enough
    use credit to avoid spending/depleting cash. Reminder, cash
    often buys a little more if you ask.


  4. One of the best memes I've seen come out of this has a picture of "Granny" hoeing her garden and says "Y'all are about to find out why your great grandmother washed her aluminum foil and saved her bacon grease."

    My grandparents and great grandparents lived through the Great Depression, with my parents growing up during it. I've heard terms like "debt slave" all my life. I suppose you could say I was taught well on the subject. I owe money on one thing and I can pay it off-or let the lender have it-pretty much at will. Debt will kill you and cash money will save you every time.

  5. Eck!s plan can be followed even in high COL areas like Orange County, CA if you have the discipline to live within your means.

    Our house is paid in full. Both car loans are 3 year notes with zero interest. I haven't paid credit card interest in 20+ years so our credit ratings are stellar. We save for vacations so even those high-cost events are paid in full the month after.

    With all the disruptions my wife has found farm-to-home and ranch-to-home direct sellers for fruit/produce and meet products so we are even more disengaged from the grocery supply chain.

    It is nice to have discretionary funds to support the Bugscuffle Writers Guild when they release a new book. Dorothy, anything in the pipeline from Annika and Restin or Raina and Akrep?

  6. Make sure at least part of your emergency funds are in cash on hand, and not in a bank where you might not be able to access it in an emergency. Even now Chase bank has made most branches drive through only, and to withdraw any significant amount of money you have to travel to the one branch that is still open. To get into a safe deposit box you have to make an advance appointment.

  7. I was much less prepared than I thought.

    – Food that I thought was 3+ months for my family of four, lasted a little over a month. Failed to account for how much my kids were eating at school, and that when people get really stressed they often eat more than normal. I need to expand my pantry space to account for this. I kept intending to fill the empty chest freezer in the cellar, now it's mocking me. (Not lazy, was waiting buy a pig and a quarter/half a cow this spring from a local farm)

    – Cash on hand was not enough, even with me still working. We went through it all rather quickly dealing with local farms and such that were cash only.

    – Masks I was partially good to go. Myself, my wife, and my older daughter could wear N95's daily until september. My younger daughter, however, most don't fit. One brand of dust mask fits her, but it's not N95 rated.

    – Water… my well hasn't run dry. Need to get at least a hand pump, or preferably solar and batteries, so I can still use it without regular power.

    – Savings took (another) major hit. Hadn't recovered after my eldest daughter spent most of a month in the children's hospital back in October (starting the day after we closed on our new home…), and then all the costs associated with this, and I was working less hours.

    – Mental & emotional preparedness needs work. My wife and kids were going stir crazy three weeks in with no real contact outside of ourselves. I was still going out and working, otherwise I probably would have been the same. Monopoly or 'Sorry' when tensions are high is NOT the best of ideas.

    – On the positive side, I haven't run out of ammo at least. Not that I've been shooting. I had just purchased a reloading press before this all kicked into high gear, so once I learn what I use supply-wise I'll need to stock up on those (Probably a lot of hornady stuff, since my primary loads in my two hunting rifles(30-39 & .35 Rem) and my two pistols are all hornady)

  8. What suburban said. I keep enough cash on hand that Mrs. Freeholder wonders about me. The legacy of those parent and grandparents during the Great Depression. Banks fail.

    Hightecrebel, there are a number of games that are competitive without going overboard. I keep a copy of Hoyles plus a number of decks of cards, a couple of sets of Rook cards, backgammon, chess, dominoes (double 12 and double 16), Scrabble and the like. If you're into newer-style board games, I'd look at Settlers of Catan.

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