A line of credit is the multi-tool of your finances, capable of tackling your toughest financial tasks. From unexpected auto repairs to unforeseen medical expenses, a line of credit can give your budget a considerable boost in an emergency.
Versatile though it may be, a line of credit isn’t the perfect fit for every one of life’s challenges. Inflation, or the rapid rise in the cost of living, is one of those challenges for which a line of credit is not a good idea.
Here’s everything you need about how to use a line of credit, and why you shouldn’t rely on it to survive inflation.
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Why You Shouldn’t Use a Line of Credit to Deal with Inflation
The online loan lender Fora describes a line of credit as a kind of short-term personal loan that provides a safety net to help with unexpected expenses. Using Fora’s definition as a rubric, inflation doesn’t pass the test.
While emergencies can differ drastically from one household to the next, they almost always share these three features:
- Unexpected. Emergencies are challenging—if not impossible—to predict with accuracy. While you might be able to guess your old beater will break down within the year, you may not know when or what repairs your car will need.
- Urgent. If your car is the only way you can get around, you need to make those repairs as soon as possible — not weeks down the line when you can save up enough for the fix. You might consider a line of credit if you can’t reasonably delay your repair.
- Infrequent. Emergencies aren’t everyday expenses you can reasonably expect in your monthly budget. Routine tune-ups and vehicle maintenance, therefore, don’t count.
Inflation fails on two out of three of these criteria. While it might feel urgent, it isn’t unexpected. Economists have been reporting on inflation since it spiked back in 2020, and it continues to make headlines today.
Inflation also affects the cost of groceries, utilities, and other household items you must pay on a regular basis, so it’s not an infrequent issue. In fact, most economists believe you will be facing higher-than-usual prices for the rest of the year, despite the overall decline in inflation.
3 Things a Line of Credit Can Help
Infrequent, urgent, and unexpected repairs may include:
- Auto repairs that go above and beyond your usual maintenance.
- Household maintenance you didn’t think to save towards.
- Medical expenses for acute illnesses or injuries not covered by insurance.
Besides using a line of credit, you can handle these unexpected expenses with an emergency fund. Financial advisors recommend saving three months of living expenses in this fund to help you handle what you can’t expect.
If a line of credit is an emergency loan, then this account is not a good option to help you handle the rising cost of living.
If you are having a hard time covering your regular bills, you still have options that don’t involve debt. Reach out to your creditors to see if you can delay your bills, check in with a debt counselling organization to help you budget, consolidate debt, and explore government assistance programs instead.