Many experts give the advice of keeping an emergency fund for the unexpected. What those experts usually mean is an emergency savings fund. However, maybe you don't want to tie up your cash that way. Is using a credit card a safe alternative? Here's what this article will cover:
- What is an emergency fund?
- When is it OK to use credit cards for emergencies?
- Disadvantages of using your credit card as an emergency fund
- Advantages of using your credit card as an emergency fund
- What are the best emergency credit cards?
- Emergency credit card alternatives
- 3 tips to help avoid debt from an emergency
What is an emergency fund?
An emergency fund typically consists of 3 to 6 months' worth of cash to cover living expenses, but this is a broad term for different situations. Your fund doesn't have to follow that model. If you lose your job or have a medical emergency, the emergency savings fund is something you could tap into for financial assistance. For that reason, as well as some others that we'll cover next, building an emergency fund is very important.
When is it OK to use credit cards for emergencies?
You can use your credit card to help pay for an emergency, but it's not ideal to use it for all of your emergency costs. That's where your emergency savings fund comes in. Hopefully, you have enough to cover the bills. If you don't, your credit card's available credit can be used together with the money you already put aside for emergencies. By the same token, using a credit card to fully replace an emergency savings fund isn't a very good idea. You don't want to risk a commitment to high interest rates and wind up in debt.
Disadvantages of using your credit card as an emergency fund
- You could hurt your credit score: Depending on how much money you need and how high your credit limit is, you could damage your credit score by raising your credit utilization ratio, which measures your debt against the amount of credit available.
- It's money that needs to be repaid: When you use a credit card to fund an emergency, you're essentially borrowing money that you'll have to pay back. However, if you don't have a plan to pay the money back, you could end up paying high interest rates and may wind up in debt.
- Your emergency card could get canceled: Credit card issuers don't like to see cards sitting unused for extended periods of time. If you plan to designate a card as your emergency card but never use it, the card could get canceled or your credit limit could be lowered.
Advantages of using your credit card as an emergency fund
- You could earn rewards while you deal with the unexpected: On the one hand, you might have a large bill for an unfortunate emergency. A cash back credit card could give back a percentage and provide a little relief. On the other hand, you might need to pay for your day-to-day expenses with your credit card. In that case, those purchases might fall into your card's rewards categories.
- You won't be stuck in a true emergency: Using a credit card to help fund a true emergency means you'll be able to get the care and assistance you need when you need it. However, there are the alternatives below to consider.
What are the best credit cards for emergencies?
The best cards to use for emergencies include:
- No annual fee credit cards: Look for credit cards that don't charge you an annual fee for the privilege of using them.
- Rewards cards: Consider cards that offer incentives. Depending on how much your situation costs or the types of purchases you have to make, you could earn perks or rewards.
Emergency credit card alternatives
Alternatives to using a credit card include:
- Personal loan: A personal loan could save you from having to pay credit card interest rates. You'll have a fixed amount to pay each month.
- Charge card: A charge card is a type of credit card that doesn't charge interest, but must be paid in full each month. This is ideal if your emergency costs aren't too high for your budget, and you'll be able to pay the charge card's balance by the end of the month.
3 tips to help avoid debt from an emergency
Here are a few tips to avoid winding up in debt in an emergency:
- Don't wait to start your emergency savings fund: Try setting up an automatic transfer from your checking account. That way you'll begin saving up and will have cash ready for when you need it.
- Store it somewhere accessible (with interest): Store your money in a high-yield savings account that will collect interest. This way, your fund could build or replenish itself faster than it would somewhere else.
- Avoid carrying credit card balances: Try to avoid carrying a credit card balance. If you're already in debt when you need to pay for an emergency, you'll just dig yourself into a deeper hole.
Using credit cards for emergencies is not unheard of. In some cases, it may work out well for you. Usually, high balances can build debt very fast. We'd suggest using your credit card's available credit together with emergency funds to pay for emergency expenses.