Using Credit to Bridge the Gap When You’re Living Paycheck to Paycheck

Using Credit to Bridge the Gap When You’re Living Paycheck to Paycheck article image.

Living paycheck to paycheck can be an uphill battle, and it's hard to focus on anything other than survival when you're just scraping by.

For many Americans, it has become increasingly difficult to stretch their money from one payday to the next. People in this situation often need some help to bridge the gap, and credit can be an effective tool for the job if used properly.

But can you maintain a healthy credit score while relying on credit in between paychecks? Which types of credit are best for a borrower in this situation? And what are the options available to someone who has trouble qualifying for traditional lines of credit?

How Credit Cards Can Help When You're Low on Cash

Credit cards generally have higher interest rates than other types of debt, but they can be an effective tool when you're in between paychecks. They're almost always less expensive than common last resort forms of financing, such as payday loans, and are a way to avoid expensive overdraft fees when money's already tight.

If you use a debit card, you may be charged an overdraft fee if a payment pulls from your bank account when you don't have enough funds available. Overdraft fees are often $30 or more, and some banks charge a fee every day your account has an overdrawn balance. If your bank's overdraft fee is $30 and you're overdrawn for three days, you'll end up owing nearly $100 in fees.

With responsible usage, a credit card can be a less expensive way to make necessary purchases. A credit card won't charge you any interest or fees if you repay the statement balance on or before the due date.

Here's how it works. If you buy $50 worth of groceries with a credit card, you'll typically be able to carry that balance for a certain period before interest accrues. This so-called grace period is at minimum a 21-day gap between when your credit card's billing cycle ends and the payment is due.

When your next paycheck arrives, you'll repay the credit card in full by your payment due date. This strategy lets you bridge the gap in between paychecks without owing more in fees or interest.

You may run into trouble if you don't repay the bill in full, because the credit card company will charge interest on the statement balance. If you can, it's important to always pay the credit card bill in full.

Why You Should Build Credit When Living Paycheck to Paycheck

Building a high credit score takes time, and it's not something you can do overnight. If you get into a jam and need credit to hold you over between paychecks, a good credit score could mean the difference between securing a high interest rate or a low one.

The habits that contribute to a high credit score can also improve your overall financial life. The first and most important habit you can learn is to pay all your bills on time. Payment history is the most important factor in computing your credit score and is responsible for as much as 35% of your score. Demonstrating on-time payment history convinces lenders that you can be trusted to make payments.

The second most important factor in a credit score is your utilization ratio, which measures your credit card debt relative to your total credit limit. Lenders like to see a ratio of 30% or less, and anything more will start to ding your credit score.

Other factors include the number of recent hard credit inquiries on your credit report, how long your credit accounts have been open and whether you have a mix of different credit types.

Check your credit score regularly to measure your progress. It can take several months to build a good score, but it takes much longer to rebuild a bad one.