The thing that makes life exciting is that it’s utterly unpredictable. You never know what’s going to happen tomorrow. Sure, you can do things that’ll increase the likelihood of a predictable outcome, but life likes to show you that you’re not in charge, not entirely. Unfortunately, the uncertainty of tomorrow can come at a financial cost and, if you’re unprepared for it, it could cost you more than it has to and send you into debt rather quickly. When an emergency happens, such as a job loss, illness, injury, or a large home or vehicle repair, many people rely upon emergency credit cards to pull out of the situation, solving one problem by creating another. Even if you only use your credit cards for emergencies, it’s often a bad idea.
The following are six reasons why.
1. A Credit Card Is a Loan
It may not feel like it because you don’t have to fill out an application every time you need to use it. You don’t already have this money; it belongs to a creditor, and you’ll have to pay it back with interest. Credit cards are so easy to use that we tend to forget that we’re spending money that’s not ours.
2. Your Debt Will Grow
If you’re using emergency credit cards because you don’t have money saved to cover the cost, then it’s unlikely that you’ll be able to pay the debt off right away. Interest will accrue with every month you haven’t paid it off in full.
3. You Won’t Look for Better Solutions
Credit cards give a false sense of security. If you believe they make you feel more financially secure, then you won’t be compelled to find a better option that makes more financial sense.
4. Your Account May Be Closed
Credit card companies often close accounts due to inactivity. If you’re lucky enough that financial emergencies are rare, then your credit card company may have closed your account automatically. It may be difficult to have it reopened if you’ve lost your job or are unable to work due to a medical emergency.
5. Emergencies Can Happen in Quick Succession
Another emergency could happen before you’ve fully paid for the first one. This means your debt would grow and become even more difficult to pay. If you can’t keep up, it could adversely affect your credit score, which could lead to higher interest rates or even denial credit in the future.
6. It’ll Ruin Your Budget
If you’re living on a strict budget, you’ll now have to recalculate it and figure out how to squeeze in a credit card payment. Your budget will be restricted until you can manage to pay off the credit card debt.
A Better Solution
The better financial solution is to create a reserve fund for emergencies before they happen. It takes time and dedication, but if you can manage to save enough for your emergency fund, you can:
- Avoid wasting money on interest
- Move on quickly after the crisis because you’ll have no further payments
- Reduce your stress by knowing you’re ready for an emergency
- Deal better with the other details of the emergency because you don’t have to deal with the financial aspect
The ideal emergency fund consists of 6-9 months’ worth of living expenses. Coming up with that amount is going to take some time, but you can budget what you can afford to save until you reach your goal. It could take years, but you’ll get there. Check this video for some helpful tips on building an emergency fund.
Once you’ve funded your emergency fund fully, you’ll be able to rest easier knowing that you have a financial backup. However, suppose you have an emergency in the meantime. Should you use a credit card then? Use your emergency credit cards as a last resort! If it’s a real emergency, use the money you’ve saved so far. Before using your credit cards, consider other options. Do you have something of value that you’d consider selling? Perhaps you have a relative that would lend you the money interest-free. If you’re affiliated with a religious group, they may assist members of the congregation who find themselves in emergencies.
If you must, use your emergency credit cards to cover the rest, but try to focus your efforts into paying off the credit card balance as soon as possible, before you’ve had to pay a lot in interest. If you had a huge car repair, get a temporary side job and use all your earnings to pay off the card.
Credit cards have their place, and if used responsibly, they can be helpful to have. However, if you’re overspending and carrying a huge balance from month to month, emergency credit cards can dig you deeper and deeper into a hole of never-ending debt.
Keep a proper perspective when it comes to your credit cards and understand that they’re not your personal piggy bank. If you put away enough money for the unexpected, you can break the reliance upon credit cards as an emergency fund and achieve financial independence.