In the present times, credit cards have become an easy solution. You can just grab your cards and go for shopping, dine out, go for a holiday, buy an big-ticket item, and what not. Only what you need is the required credit limit.
Many of us have also started relying on credit cards for emergency fund. But, there are certain risks associated with it. Not always it’s a good idea.
If you do so, you should be aware of the risks associated and how to avoid them.
Researches have revealed that:
- About 26% people in our nation do not have any emergency fund.
- Only about 40% of families have savings worth of meeting 3 months’ daily necessities.
So, what will you do? Will you consider credit cards for emergency situations or try to build a fund for emergency purposes?
Answer 2 questions to make the decision
To decide whether or not you can rely on credit cards for emergency fund, first answer these 3 questions honestly:
Where will you place yourself financially?
Needs vary. You have to decide how much you need to have in your emergency fund.
To assess this, consider the stability of your job, your assets - home, vehicle, etc., your health condition and your expenditure in comparison to your income.
So, think - if you rely on credit cards for emergency situations, check out - do you have enough credit limit? Moreover, it’ll be difficult to repay the amount. We’ll discuss this in the next point.
How much risk you’ll be able to handle
First of all understand that by deciding to use credit cards as emergency fund you’re taking a big risk.
Are you sure you can handle it?
Now comes the interest rate.
Moreover, check out the rate on interest on your card(s) on which you have higher limits.
So, isn’t it better to create an emergency fund?
When you can rely on credit cards for emergency fund
The question is, when and who can unquestionably rely on credit cards instead of creating an emergency fund?
Can it be advantageous in certain situations?
Let’s find out.
Instead of putting the cash in a savings account on which you may be earning 1% interest, you can use the dollars to repay high interest credit card debt, pay back auto loan, pay off mortgage loan, and so on.
If you use the cash anywhere else, you may lose the liquidity.
Risks associated with relying on credit cards for emergency fund
As already discussed, there are obviously risks associated with using credit cards for emergency fund.
Annoying interest rates
If you don’t pay back the outstanding balance in full within the due date of the monthly cycle, you’ll have to pay interest, however nominal it is.
So, with the increase in the credit limit, there might be a higher chance that you’d pay more interest to the credit card issuer bank.
And, if you start rolling your debts from one month to another, you may start facing debt problems and difficulty to repay the debt.
Credit limit on the hands of issuers
Ultimately, your credit issuing bank will decide your credit limit. You have no role in it.
Credit limit may get reduced
Do you think you can bank on your credit limit and it is quite high? If you think so, you’re making a big mistake.
If you lose a job, your credit card issuer can reduce your credit limit.
Easier to incur debt
I think this point requires no explanation. More or less every one of us are aware of the pitfalls of using credit card and not paying back the amount at the end of every billing cycle.
Is is actually very easy to incur debt with a relatively higher credit limit.
So, it is advisable to avoid being in such a situation. However, if you have already incurred credit card debt, don’t panic. Just look for a suitable way to repay credit card debt.
How to avoid the associated risk
Here are a few tips to avoid the risks associated with using credit cards for emergency purposes.
Avoid carrying balance on your cards
Be a responsible user and you'll find that credit card if your best friend.
Avoid swiping your card for an amount which you don’t have in your checking or savings account.
Take out a separate card
Do not use it regularly and keep it strictly for emergency use.
Build an emergency fund at any cost
Open a savings account at your preferable bank and opt for automatic transfer from your any salary account to this new account on a particular date every month.
Do this and relax! You will start building this fund without having to think about it.
Take out a charge card
You have to repay the entire balance on a charge card.
No interest charges are there on that card.
To conclude and sum up, an emergency fund seems to be better than relying on credit cards for the purpose.
Think once again - If you save about $20 a week and put it into your emergency savings account, you’ll earn about 1% interest on it. Thus, you’ll save about $1,000 plus the interest amount in the savings account in 1 year.
Now, you calculate how much it’ll be after, say about, 5 years.... A decent amount to bank upon!