Having a credit card for use in emergencies is a good idea. If you’re in a bind – for example, if you need to replace your stove or if you need to fix your main car – you can pay for it with your credit card. However, relying on a credit card to cover unexpected expenses is not the best financial decision.
Using a credit card in emergencies is like taking out a loan
It’s a fact, but think about what it means. It means you are essentially taking out a loan to cover emergency expenses because you cannot afford to pay for them out of pocket. This means you will have to pay back the borrowed amount.
If you can’t afford to pay the entire amount at once, that means you’ll have to pay interest. If you aren’t already making monthly payments on this credit card, you’ll have an additional monthly expense to fit in with your current spending.
If you have a credit card, you’re less likely to look for other solutions in emergencies
Having a credit card as an emergency fund can make you lazy. You may not look for self-help solutions, negotiate for a lower price, or search for better rates because you believe you already have a viable solution – your credit card.
What if you spent cash from your emergency fund instead of using your credit card? You may want to keep as much of that cash as possible, so you might try to find cheaper alternatives to fix your problem.
Using a credit card to cover emergencies puts you in debt
Technically, you are already in simple debt when you carry a balance on a credit card. However, making a single purchase on a credit card, even in an emergency, can lead to a momentum that results in more credit card purchases, potentially leading to more debt than you can handle.
You should be careful of the temptation to make credit card purchases beyond your current balance and resolve not to make additional purchases on the credit card until you pay off your emergency debt.
An inactive credit card may be canceled, or limits may be reduced
If you have a credit card that you keep for emergencies, it may be canceled after several months of inactivity. Alternatively, the credit card issuer may lower your credit limit, making it difficult to finance a full emergency using your credit card. You may have to use available credit on multiple different credit cards to cover your expenses.
Relying on a credit card for emergencies puts you at the mercy of the credit card issuer, who may or may not decide to extend enough credit for your emergency situation.
Another emergency could lead to losing control over your finances
There is no guarantee that emergencies will happen one after another, and only after you have settled the credit card balance from the previous emergency. They are emergencies, after all; they happen randomly. What if another emergency occurs and your credit card balance has already maxed out from the first emergency? Your options decrease as your credit card balance increases.
It will be difficult to build an emergency fund with a credit card balance
Saving money can be challenging, and that may be why you don’t already have an emergency fund. It will be difficult to build an emergency fund while making minimum (or more) payments on a credit card. Imagine if you had emergency savings before the emergency. Then the money you are now spending on your credit card payment (and interest) would be going back into your savings account and potentially earning interest.
If
If you didn’t have enough money in your savings accounts to cover unexpected expenses at the time of the emergency, you don’t have many options. Therefore, of course, borrowing on a credit card is better than many alternatives, such as overdrawing your bank account or getting a payday loan.
You can be sure that in life, financial emergencies will happen. Since you learned that it’s best to pay those expenses out of pocket instead of putting them on a credit card, now is the time to start building an emergency fund.
You may not be able to put a lot of money into your emergency fund, but start where you can; adding $25 or $50 a month is a good start. Set a goal for your emergency fund, such as $500 or $1,000, and work towards it. And don’t stop there; the ideal fund is six months of living expenses, so make that your long-term goal.
Source: https://www.thebalancemoney.com/why-using-your-credit-card-for-emergencies-is-risky-960992
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