Credit Card as an Emergency Fund

March 15, 2010

We all should know that having an emergency fund is of the utmost importance. If you put away some money for hard times, you won’t be as likely to fall behind when something unexpected happens. The peace of mind that affords is priceless. Still, lots of people do not see the logic behind having an emergency fund. They reason is that they feel they can use their credit cards if an emergency comes up, so they don’t bother trying to save up a financial cushion. Some do this simply because it’s so much easier, while others reason that they can get a better return on their money by investing it.

Here is some advice on why NOT to use your credit card as an emergency fund.

  • Credit cards make accessing funds a little too easy. Whereas you would probably think twice about withdrawing money from savings to buy a pair of shoes that’s on sale, the ease of pulling out the plastic to pay for it could easily prevail. There’s nothing wrong with charging something every now and then as long as you pay it off quickly, but if you make it a habit, your “emergency fund” will keep getting smaller and smaller.
  • The credit card company could lower your credit limit, thereby shrinking your safety net. Some card issuers will lower your credit limit even if you have good credit, citing certain risk factors or the fact that you’re not using the full amount. If this happens, you could instantly end up with nowhere to turn when you need money.
  • If you use your credit card for a big emergency (such as to keep you afloat in the event of job loss), you’ll end up paying a lot of interest. And while you’re paying off that credit card bill, you’ll be without an emergency fund. Had you saved up money in a true emergency fund instead, all you would have to worry about would be building it back up.
  • Some emergencies require cash instead of plastic. If you find yourself unexpectedly lacking the money to pay the rent, for example, you’ll probably need cash to pay your landlord. If a credit card is your only emergency fund, you’ll have to get a cash advance on it. And cash advances usually carry much higher interest rates than purchases, so you’ll end up paying even more for that money than you would otherwise.
  • Everyone needs some money set aside in case something unexpected happens. A credit card can be helpful, but it’s much better to have real cash in such a situation. This will ensure that you know how much money you have, and it will keep you from having to pay it back with interest.

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