In the world of personal finance, it can be difficult to navigate how to approach financial challenges and unanticipated expenses. When emergencies come up, and you don’t have money set aside to handle them, what solutions are there for you?
Often, in personal finance dilemmas such as these, many people turn to credit cards for emergencies. It’s understandable, as a high credit limit could cover the costs of an emergency expense you don’t have cash for. However, can an emergency credit card damage your overall credit health?
And further than how it might affect your credit score, it is important to consider what maxing out the credit line of a few credit cards could do to your financial situation on the whole. Problem debt can be immensely challenging to free yourself from, so it’s important to take every financial decision seriously, even in the case of an emergency.
Should You Use Credit Cards for Emergencies?
Sometimes when there are little to no other options available to you, credit cards for emergencies can be the one way you get through a hard time. Instant approval credit cards can be easier and quicker to get than most personal loans, which can make them helpful in emergency circumstances.
On the other hand, using an emergency credit card in place of an emergency fund can easily become a recipe for trouble and unmanageable debt. There are several reasons why relying on an emergency credit card can be risky to both your credit score and your finances.
Why Emergency Credit Cards Can Be Risky?
Using an emergency credit card as if it is an emergency fund can be particularly risky it’s borrowed money that may be difficult to pay back directly after financial stress.
The card’s credit limit might be higher than you actually need, but since that money is available, you might not be able to fight off the temptation to spend the entirety of the credit line. Most credit cards have a moderately high-interest rate. And the interest rate can be even more costly if you have poor or fair credit.
Once the emergency has passed, the balance on your emergency card is still rising steadily, thanks to your interest rate. Sometimes the fees and charges can be so substantial that they are higher than the monthly payments, which could mean that your on-time minimum payments do nothing to chip away at your emergency card balance.
The Dangers of Problem Credit Card Debt
When you begin to rely on credit cards for emergency expenses, it can quickly become habitual which could lead to high levels of debt. High-interest debt can become problematic frighteningly fast because the monthly payments can become impossible to afford. This could damage your credit report and mess with your monthly budget.
Effects on your credit score from using credit cards in emergencies could prevent you from qualifying for a new account by a credit card issuer in the future. Once you stack up credit card debt high enough, you could have no more room on your credit limit when another emergency or unexpected expense comes your way.
Exceptions To The Rule
While most financial experts would advise against relying on a credit card for emergency situations, there are some exceptions to the rule. There are several instances where there could be a benefit worth the risk or in dire circumstances where it is the only best option.
0% Intro APR
Getting a 0% intro APR promotional offer from your credit card issuer could change the risk level of using credit cards for emergencies. A low-interest credit card might still be too costly if you can’t afford to pay off the balance within a couple of months after your emergency expense. However, a credit card with a promo offer of a 0% intro APR could allow you to borrow money up to the card’s credit limit completely interest-free if you can pay off the balance before the end of the promotion.
Some credit cards offer a 0% intro APR for a whole year to 18 months, as many borrowers use the promo for balance transfers. If you use a 0% intro APR strategically, you can pay off the balance on the credit limit before the 0% interest rate ends so that you never pay interest at all. You’ve covered your emergency expense with no interest or cash advance fees, simple as that.
However, if you aren’t diligent in paying off the credit card’s balance before the 0% intro APR ends, you could be in for a very high-interest rate. So, if you do this route for handling an emergency, you must be sure you have the resources available to pay it off in under a year or 18 months, whichever length of time the promo lasts.
Emergency Credit Cards As a Last Resort
Another instance where emergency credit cards might be worth the risk is when you don’t have other options. When you don’t have money saved up and set aside for life’s unexpected twists and turns, you might not have many solutions for handling your emergency.
The high credit limit you have available on one of your credit cards could be more money than you have in your bank account and help get you through a hard time. Depending on your credit score and the financial institution, the interest rate on a credit card could be better than a payday loan or other personal loans for poor credit. Compare and contrast what a personal loan might cost you versus the interest rate or perhaps cash advance fees on a credit card.
Recovering From The Emergency
If you do decide to use a credit card to help you in an emergency, it’s important to know how to handle the debt quickly so you can protect your credit score and avoid allowing it to get out of hand.
Here are a couple of tips for how to handle your emergency credit card balance:
Pay Off Your Emergency Credit Card ASAP
Once you get back on your feet after your emergency, start paying off the credit card balance as quickly as you can. Don’t continue adding to your balance even if you have room in your credit limit. Stop using the credit card and make on-time payments to maintain your credit score. Rearrange your budget temporarily to pay off the entire balance off as fast as possible.
If you are concerned about the state of your credit report, you have a legal right to an annual free credit score from each of the credit bureaus. Once you request your free credit score, you can pick apart what ways in which you might be able to improve it. If you have fair credit, simply minimizing your credit utilization rate by paying off your emergency credit card could be exactly the thing to get you a good credit score.
Use Balance Transfers
If the credit card that you used for the emergency expenses now has a staggering interest rate, you could look into using a balance transfer card to pay less on interest. Some balance transfers even offer a 0% intro APR so you can pay off your credit card balances before you’re even charged interest.
It is important to double-check the possible fees involved before going forward with qualifying balance transfers. The credit card issuer might charge an annual fee or a balance transfer fee.
Once your credit card balance has been paid off, it’s time to set yourself up for future financial success. Better preparing yourself for a future emergency with an actual emergency fund will allow you to avoid relying too heavily on a credit card in the future. With a savings account designated for life’s surprises, you can kiss the need for an emergency credit card goodbye.
Tips For Building An Emergency Fund
Building your own emergency fund can be intimidating when you’ve never really been much of a “saver.” But it is well worth the effort when you have a chunk of cash to fall back on when things go wrong without having to worry about an interest rate, annual fee, or cash advance fee.
Here are a couple of tips, tricks, and strategies to get you started on building your own emergency fund from scratch:
Start With a Small Goal
An excellent starter emergency fund is typically $1,000. This is the size most financial experts recommend for those new to saving. As your earning potential grows and your needs change, you can increase your emergency fund to be several months of income. However, aiming too high right off the bat can make it harder to motivate yourself. Start with $1,000 and work your way up!
Set Up a Direct Deposit
Open a brand new account designated specifically for emergencies, even if you already have savings accounts. We suggest looking into banks that offer an account opening bonus because you may be able to receive cash rewards to put you ahead in your saving journey.
The Chase Ultimate Rewards program offers a platinum credit card, but that’s not the only way to get cash rewards with Chase. Their bank also provides $200 in cash rewards for the account opening to all new customers.
Once you have your new account, set up a consistent monthly transfer from your checking account into your savings. This will ensure you are constantly putting away the same amount of money each month, and everything you save on top of it will be like a bonus.
Redirect Unnecessary Expenses
Review your monthly budget to determine whether there are any expenses you can cut down. Certain expenses are worth foregoing for a short time to improve your overall financial future. You could add an extra hundred dollars a month to your savings by canceling a subscription service or two.
Cut down any unnecessary expenses you can find in your budget until you’ve reached your saving goal, and then you can reintroduce them after you have your emergency fund set up.