Borrowing during Inflation

A Guide to Responsible Borrowing During Inflation

Inflation may not be as high as it was a couple of years ago, but it’s still flying far above its usual benchmark. Right about now, the annual inflation rate is hovering around 6.4%, which is approximately three times what it was before the pandemic. In other words, everything you buy costs almost three times as much today as back then.

Understandably, your money doesn’t go as far as it once did.

A credit card, line of credit, and installment loan are convenient financial tools when money is tight, but they can become crutches if you overuse them. Before you know it, you can max out your credit cards and owe a lot in loans online.

It can be tricky to navigate how to use these accounts when inflation is so high and zapping your purchasing power. But these tips can help you use them wisely.

1. Keep Installment Loans as Emergency Backups

One of the most common ways to borrow online is with an installment loan. Installment loans give you limited funds upfront that you can pay back over time.

Legitimate online direct lenders recommend installment loans only if you have no other way to handle a singular, unexpected emergency. Let’s say your water heater stops working one day, and its replacement exceeds what you have in your emergency fund. You may use an installment loan to afford a new tank.

But what about water bills now that utilities cost more due to inflation? Installment loans aren’t the answer. That’s because you can expect your water bill on a regular basis; installment loans are for surprise, one-off repairs, like a water heater replacement.

2. Budget Using a Credit Card

Using a Credit Card

Unlike installment loans, credit cards can help you with recurring, everyday expenses.

People of all ages and salaries rely on the plastic in their wallets to buy groceries, fill up their gas tanks, and pay bills. It can be a helpful tool to avoid debit charges (if your bank limits these) and earn cashback (if your credit card offers rewards).

However, they can come with enormous limits that tempt you to spend more than you can on things you don’t need. Even if you think you can resist, psychology proves otherwise. Studies show people consistently spend more with credit cards than with cash.

To avoid spending more than you can afford, make sure you make a budget and stick to this plan. Only ever charge something to this account if you can pay it off, in full, by the due date.

3. Have a Contingency Plan

Credit cards and lines of credit can be alternative safety nets to installment loans, but they work slightly differently.

With an installment loan, you’ll receive a predictable schedule with fixed payments, no matter how you use your funds in an emergency. A line of credit, on the other hand, reflects your usage. As a result, the amount due in each billing period can fluctuate wildly.

Budgeting can help you anticipate these changes, but let’s be honest. Sometimes, you have to put unexpected expenses on this account, and you can’t afford to pay them off in one lump sum.

In these situations, do the next best thing. Pay it off as quickly as you can, using your budget to push more money towards this account.

While it may be small, this habit — like the other tips shared here today — can help you use your credit with confidence until inflation finally comes crashing down.