If you only knew one thing about credit cards, here’s what personal finance expert Bola Sokunbi would want it to be: Credit cards are not your emergency fund.
“A lot of people say a credit card is an emergency fund, but it really isn’t,” says Sokunbi, founder of Clever Girl Finance. “Credit cards are not your money. I think people forget that.”
An emergency fund can be a lifeline when the unexpected happens — from covering a short-term expense to helping you get through longer periods of financial hardship. Without savings to cover costs in those instances, some people may turn to credit.
“It’s not a good idea unless it’s your last resort, because you’re going to pay for it in high interest,” says Sokunbi. Treating your credit card like a backup plan can have expensive consequences, and even damage your credit score. Instead, she says, you’ll be much better off saving as you go — even just a little every week — into a savings account you won’t touch unless there’s an emergency or disruption to your income.
Here’s why relying on your credit card for an emergency is risky, and how you can better prepare for unexpected expenses.
Why a Credit Card Isn’t Ideal for Emergencies
There are many situations in which you might take on an expense outside your typical budget — a sudden car repair, for instance, or medical emergency. If you don’t have the cash to pay upfront, it might seem obvious to charge the cost to your credit card, especially if it has a high enough limit to cover the cost in full.
But like Sokunbi says, your credit limit is not your money — it’s borrowed from your issuer. If you’re relying on a credit card instead of an emergency fund to cover an emergency bill because you can’t afford to pay it out of pocket, that can be a slippery slope to rapidly growing, high-interest debt balances.
“If you can’t pay your credit card in full [when the balance is due], it’s a really bad idea,” says Rebecca Montaño, a certified financial planner and founder of Sunday Planning, a financial planning firm in Denver, Colorado. “Because it could just backfire really fast, even if it’s not your intention.”
Most credit cards charge double-digit interest rates — anywhere between 10% and 25% — when you carry a balance. Taking on credit card debt at that rate could potentially set you back hundreds or even thousands of dollars in accrued interest over time, making it even harder to pay down as time goes on.
In addition to that, any spike to your credit card balance increases your credit utilization, or the amount you owe relative to your credit limit, and could negatively affect your credit score. Without a solid credit score, you may have difficulty getting approved for debt repayment options like balance transfer credit cards, as well as a future mortgage or auto loan.
How to Build an Emergency Fund
Sokunbi and other experts say an emergency fund — ideally with enough cash to cover several months’ worth of expenses — is a much better method to cover unexpected costs than a credit card. And the best time to start saving is before an emergency situation strikes.
Building your emergency fund can give you peace of mind no matter what financial obstacles you face. Whether you need to cover the cost of a new home appliance or you get a hefty hospital bill, you’ll be glad you have a cushion.
“It’s a small sacrifice in the meantime, but with the long-term reward,” says Montaño. You can get started with these six steps:
- Learn the benchmarks: Financial experts have different recommendations for how much cash to keep in an emergency fund, but three to six months’ worth of living expenses is a good rule of thumb.
- Evaluate your expenses: Figure out which expenses would be essential to you during an emergency and use it to inform your savings goal. If your budget is tight, consider cutting any non-essential expenses — such as takeout or subscriptions — and reallocating any leftover money to your emergency fund.
- Start small: Start with a smaller, shorter-term plan and increase your savings over time. For example, putting an extra $20 away every week will amount to $480 saved in six months. If you find that doable, try upping it gradually to save more in a faster amount of time.
- Automate the process: Consider automatically sending a portion of your paycheck to your savings each month to help you stay consistent. “I think of it this way: If it’s not automatic, it’s not getting done,” says Montaño.
- Revisit your plan: Whenever your circumstances or income changes, reconfigure your savings plan. This adjustment could happen after getting a new job, buying a house, or even retiring. And don’t forget to replenish your emergency fund whenever you use it.
- Decide on an account: Be intentional about where you keep your emergency savings. Generally, a high-yield, online savings account can provide easy access to your money when you need it, with the added benefits of small interest payments over time.
Other Ways to Get Through an Emergency
Trying to weather an emergency without savings can be challenging, but there are alternative resources you can turn to before relying on credit.
Consider reaching out to your current creditors, lenders, and other financial institutions to ask for help; you may be eligible for financial hardship assistance plans that allow you to delay or stretch out payments. Most importantly, stay in close communication with your creditors and lenders to figure out a plan rather than ignoring or avoiding your bills.
Some credit unions and smaller banks offer emergency loans, which tend to be more affordable than costly payday loans or high-interest credit card debt. Payday loans are known for their outrageous interest rates and can leave you worse off than before, so you should avoid them at all costs. Credit unions also usually offer more flexible qualification requirements for loans than traditional banks or lenders. Read the terms carefully before taking on these loans, as they can also carry high interest rates.
It may also help to look for ways to reduce your budget — look for recurring subscriptions and fees you can trim, ways to save at the grocery store, or unnecessary expenses that might be adding to your costs — to further stretch your cash flow.
Some financial planners and nonprofits offer free services to people experiencing financial hardship, especially since the start of the COVID-19 pandemic. They can help you make a plan to minimize the long-term impact of any hardship you’re facing. If you have close friends or family, you may also consider asking someone you trust for a loan to help you to reach the other side of an emergency.
If You’re Out of Options, Look For These Qualities in a Card
If you don’t have an emergency fund to lean on and you need to use a card as a last resort, you can avoid making a bad situation worse by choosing the right credit card to pay for an emergency expense. Here are a few qualities you should look for in a credit card to use in an emergency:
- 0% introductory APR: This feature is like a pause button on interest charges for a length of time, typically 12 to 18 months, depending on the card. The U.S. Bank Visa® Platinum Card has one of the longest intro periods available today, with 0% interest on new purchases and balance transfers for 20 billing cycles, then a 15.24% – 25.24% variable APR. If your unexpected expense doesn’t need to be paid immediately, applying for a 0% interest card can give you an extra few months to pay back an emergency expense before interest kicks in.
- No annual fee: Pay for an emergency with a card that doesn’t cost you a yearly fee to use or keep.
- Low regular APR: Credit cards are known for their high interest rates — in fact, Federal Reserve data shows the average APR across all credit card accounts is 14.54%. If you know you’ll need to carry a balance to pay off an expense over time, a card with a lower ongoing APR can help reduce the overall interest you’ll accrue.
- Instant approval: It may be helpful to have instant access to a credit card that hasn’t arrived in the mail yet if you’re dealing with an emergency. Some cards give you account access via online payments or the option to connect to a digital wallet before you receive the physical card by mail.
- No penalty APR or late fees: You should always prioritize paying your monthly bill on time, but a card with no penalty APR or late fees can help you avoid an increase in your interest rate or unnecessary fees if you ever have a slip up or can’t make a payment due to financial hardship.
Only consider putting an emergency expense on a credit card if it’s your last resort. In the long run, taking on high-interest debt to cover an emergency can put you in a worse financial position over time.
“Once interest starts to compound on a credit card, it can be a very slippery slope,” says Sokunbi. “What people fail to realize is that it’s never the principal balance that keeps you stuck. It’s the fact that interest is compounding sometimes on a daily, weekly, monthly basis, and that can, over time, cause the debt that you owe to far exceed what you borrowed.”
If you don’t have an emergency fund, start building one now to help you ride out any financial hardship in the future without going into debt. Contributing even just a few dollars a week to a savings account can make all the difference later on, and help you reach the other side on more solid footing.