Frugality Magazine - Frugal Living Tips for Financial Freedom

Why Credit Cards Aren’t an Emergency Fund

Contents

When you're trying to manage your money it's tempting to ignore an emergency fund and aim to use your credit card in case of emergency. Here's why that might not be the best financial decision for your life. I dearly love my emergency fund.

However there’s one recurring argument against having an emergency fund that keeps on cropping up…

Whenever I’m singing the praises of building an emergency there always seems to be someone who tells me they don’t need one because they have a credit card.

Today I’d like to address that point, and explain why I think an emergency fund is still an essential part of a strong financial footing.

An Example Emergency Fund Situation

For the sake of this article, let’s assume that you just lost your job. It’s going to take you a couple of months to find new employment; what with all the job hunting, sending out customized resumes, attending interviews and so on.

The question is how an emergency fund differs from living off your credit card for a few months till your new salary starts to roll in…

Start Off In The Black

When a financial emergency arises – such as your income drying up – you have two different options.

You can either start in the black or in the red.

As soon as you start paying for items on a credit card you start to go into debt – into the red.

The alternative – with an emergency fund – is that you’re not getting into debt.

Instead, you’re using cash that you’ve saved to survive.

This is important for a number of reasons…

You Don’t Control Debt

The sad fact of the matter is that it’s not you that controls your credit card debt; it’s the bank.

They can, at any time and for any reason, block your credit card.

If you’re standing at the checkout with a trolley full of groceries and your only credit card won’t work then you’ve got a real problem.

There are other risks too.

Banks don’t just block credit cards; they can cancel them at any time, or demand that you repay the outstanding debt in full.

If you’re suddenly unemployed and have no money coming in, you can bet that your bank will start paying more attention to your financial situation, making this sort of activity even more likely.

How would it feel to have your only credit card cancelled by the bank, or have them demand that you repay the full balance of your card?

Credit Cards Aren’t Always Accepted

You might be able to pay for your groceries or fuel for your car using a credit card, but there are a variety of situations where credit cards may not be accepted.

Here in the UK try paying your rent with a credit card, or your council tax, and you could be in for a nasty surprise.

No problem, the haters tell me, they’ll just withdraw cash off the card and use that.

But the typical fees for doing this are even higher than those for normal credit card purchases; so it’ll take you even longer to get back on an even keel when you’re earning again.

Credit Cards Can Be Plan B

Let’s say that you have a credit limit of $5,000 on your credit card. A few months without work can quickly start to push you ever closer to that limit.

But what if you had an emergency fund of the same size? In this situation you’ll have a lot more leeway. You’ll be able to carefully work your way through your emergency fund before you need to consider using your credit card.

As a result people with emergency funds and credit cards have twice the “buffer” or security than those people who plan to rely on credit cards alone.

Building Up Debt Without Income

The final point worth making here is that building up debt on a credit card when you have no income is probably not the smartest financial move.

Consider, for example, how you’re going to meet those monthly payments.

Are you going to have to rely on withdrawing cash from your credit card, in order to pay the fee?

Surely that should be a red flag that things aren’t as they should be?

And when you do finally land that job, how long is it going to take to pay off your card and get back in the black? For some people, with minimal disposable income, such a financial situation could take years to resolve.

And let’s not forget that you’re paying interest on any credit card balance that you haven’t settled the same month.

Conclusion

Hopefully by now I’ve convinced you that a readily-accessible account filled with enough cash to cover your living expenses for a few months is a smart idea.

A lot smarter than just relying on credit cards at least.

A cash emergency fund offers extra security, more financial options and makes it easier to get back on your feet when the financial emergency is over.

Credit cards, if managed properly, certainly do have their uses and I’m not a member of the “Credit Card Haters Society”.

But I think the logic suggests that they should really only ever be a Plan B, and that utilizing your cash emergency fund should be the major priority when financial surprises arise.

So go on – start building an emergency fund today.

If the worst ever happens you’ll thank your lucky stars that you took the initiative.

Do you have an “emergency fund”? How many months of expenses do you keep handy just incase? Please leave your experiences in the comments section below…

When you're trying to manage your money it's tempting to ignore an emergency fund and aim to use your credit card in case of emergency. Here's why that might not be the best financial decision for your life.

Richard

Sun-worshipper and obsessive frugality blogger. For loads more money-saving advice come and join us on Facebook.

3 comments

  • Yeah I think it’s really important to resort to credit cards only when everything else has been exhausted. We have three months of funds in a savings account, two additional months in a checking, and then some stocks that we could sell if we really needed to. It took us a long time to get to that point, though, and I would encourage everyone to start saving sooner rather than later. Even a small amount of money each month can help over time.

  • These are some really good points. I lean towards a credit card as part of an emergency fund but what you said about having both giving you twice the buffer is on point. I think it also depends on your situation-are you in a secure job (as secure as jobs ever are) or does your employment hinge on factors beyond your control (say, the price of a barrel of oil)? Do you have other income streams? I think with the more stable of income and the more diverse your earnings are, the more it is okay to use your credit card as a back up.