Most people turn to credit cards when they’re strapped for cash, but financial advisors say they should only be used as a last resort, and that consumers should consider other options first.

According to the Federal Reserve Bank of New York, credit card debt reached a record $1.03 trillion in the quarter ending in June, and the average interest rate paid by those carrying a monthly balance reached nearly 23% in August, the highest rate since at least 2018.

Servicing credit card debt could also become even more costly if the Fed decides to raise its benchmark short-term federal funds rate again before the end of the year, as part of its ongoing battle to bring inflation back to its 2% target.
Given these costs, Americans should look for other, cheaper ways – such as life insurance, family and friends, even their 401(k) and banks – if they don’t have enough savings for emergencies and need to tap short-term cash, financial experts say.

“Using your credit card now should be the starting point,” says Dan Casey, investment advisor and founder of Bridgeriver Advisors in Bloomfield Hills, Michigan.

Why shouldn’t I use a credit card?

Credit cards are fine for small purchases to help you manage your monthly cash flow, and if you pay off all or most of the balance on time.

However, if you’re using your card to pay for everything, big or small, and your balance is growing every month, it may be time to reconsider, experts say. Interest rates are so high right now that you’ll end up paying a lot more to pay off your credit card debt.

How can I borrow money immediately?

According to Casey, the least expensive options if you need money in the short term are, in order:

  • Life insurance. Universal or whole life insurance usually includes a cash value that allows you to take out a tax-free loan at lower rates while keeping your money invested. “It’s fast-you’re in your account within days,” Casey explains. “The only cost is the interest rate, but it’s so flexible that if you lose your job, you can pay it back when you find one or never pay it back at all. If you don’t pay, the amount is deducted from your death benefit.”
  • Family and friends. Asking family and friends to lend you money can be uncomfortable, but “you can do it legally, for a 5% commission and a contract”, he adds.
  • Participatory lending. Conditions are flexible and interest rates tend to be lower than other loans, because they’re secured by your home. And if you use the money to build or improve your home, the interest can be deducted from your income tax. However, if you need money fast and haven’t opened an account yet, it can take up to two months to get one. “The downside is that you need to be sure you can repay the loan, because your home is at risk,” Casey warns.
  • 401(k) loan. These loans have been steadily increasing since 2020, according to a recent survey by investment firm T. Rowe Price. Rowe Price. Interest rates on these loans are generally lower than on other types of loans, but you pay the interest to yourself rather than to a lender. They are tax- and penalty-free and have no impact on your credit rating because they are not reported to the credit agencies. Payments are usually deducted automatically from your paycheck. But be careful: if you lose or change your job, you must repay the loan in full. If you don’t, it will be considered a withdrawal and you’ll have to pay taxes and a 10% fine if you’re under 59 1/2. You’ll also lose the option of placing the borrowed money in a tax-advantaged account, and your interest will not be tax-deductible.
  • Personal loans. Rates can be high, depending on your credit rating and history, the amount you need and the lender’s requirements. However, it can also work in reverse and improve your credit. “Paying off a bank loan on time can help improve your credit rating,” explains Grace Salvino, wealth manager at Performance Wealth, a registered investment advisor. Plus, if you can get a low rate, a personal loan can be more advantageous than a 401(k) loan, Casey noted. Be careful, though, as you may have to pay penalties or fees if you repay the loan early or miss a payment.
  • Withdraw emergency funds from the 401(k). You don’t have to pay them back, but the money is permanently removed from your retirement savings. You must also pay taxes and any penalties on the withdrawal. The rules are also strict: the amount is limited to what you absolutely need to satisfy your “urgent and immediate financial need” and the “need cannot be met by other available resources”, said the IRS.


What’s the bottom line if you are low on cash?

The days of cheap money are over, as the Fed conducts its most aggressive rate hike campaign in forty years to fight inflation. While it’s easy to keep using your credit card, financial advisors say it’s better to analyze your budget, calculate how much you think you’ll need, and explore cheaper solutions to finance your short-term needs.
“Hopefully, you’ll never find yourself in this situation,” said Casey. “Everyone should have three to six months of emergency funds.

Medora Lee is USA TODAY’s money, markets and personal finance reporter. You can contact her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news Monday through Friday.

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