Your Credit Card is Not an Emergency Fund

You know that you need an emergency fund. An emergency fund can help keep you solvent when unexpected financial catastrophes arise. Many people, though, forget that a good emergency fund is one that you build up over time, so that you have a reserve of cash. A credit card does not fall into this category, no matter how much you would like it to. The simple fact of the matter is that a credit card is not an emergency fund, and it shouldn’t be considered as such.

Why Credit Cards Make Bad Emergency Funds

The whole point of having an emergency fund is so that you can tap into your resources without needing to resort to using debt. Using a credit card as an emergency fund defeats that purpose. Instead, you end up with more debt when you use a credit card to fund your emergencies. The interest you pay on the credit card is also quite high. Using a credit card as an emergency fund can actually make matters worse by the time you pay interest back on top of the amount used for the emergency. When you have an emergency fund in an interest bearing account, your money is working for you, rather than against you.

Another issue is that you will have to make monthly payments. If your emergency is big enough, even the minimum payment on the credit card can be a financial burden — especially since you will have to start making payments immediately. With a properly set up emergency fund, you can begin rebuilding after the emergency has passed. You don’t have to worry as much about paying off your emergency while you still may be in a difficult position.

Finally, using a credit card as an emergency fund confirms you in habits that are not likely to contribute to your financial health. Such an arrangement gets you into the habit of turning to your credit card frequently to solve problems. This can develop into a habit that can put you further in debt.

Credit Card for Emergencies vs. Credit Card as Emergency Fund

In some cases, having a credit card for immediate emergencies makes sense. You might be stuck out in the middle of nowhere, needing your car towed (this has actually happened to me). In such situations, a credit card can be quite helpful, since you may not be able to get to an ATM (or want to pay the fees if you could find one). The flexibility of a credit card, along with the purchase protections that can come with it, can be comforting and useful when you are away from home in an emergency situation.

However, using your credit card for an emergency is not the same as relying on it as your emergency fund. If you use a credit card in a tough situation, you should pay it off as quickly as possible, reducing the balance so that you limit the interest you pay. You can use money from your emergency fund to help pay down the credit card, and then make a plan to rebuild the fund. This way, you are avoiding the debt trap by using your emergency stash to pay off emergency use of your credit card.

11 Responses to Your Credit Card is Not an Emergency Fund

  1. “The whole point of having an emergency fund is so that you can tap into your resources without needing to resort to using debt.”

    Uh, no. You’ve lost me already with this sentence. This is a circular argument.

    The point of an emergency fund is to fund emergencies. Clearly if you define an emergency fund to exclude credit, then credit cards will be excluded. That is tautological, and it’s not particularly persuasive.

  2. I just had a friend telling me he is using his credit card as his budget tool as the limit is exactly what his monthly budget its!!! This horrified me as I can see it getting nasty soon but he won’t listen.

    People should really ditch the cards until they have a lot of spare cash to burn.

  3. @Forest Yes, I can see your friend’s situation getting ugly fast. Paying with cash is really the best way to go until you have your savings built up. If you do use your credit card in an emergency situation, be sure to pay it off as soon as possible.

  4. This is a common mistake young people make. Using your credit card as your emergency fund can create big debt problems down the line – instead, work with your bank to develop a savings plan.

  5. It’s very tough to convince people with credit card debt that they should save an emergency fund. They would be better off creating a budget and tracking every penny in and out of their lives so that they begin to live within their means and stop using the credit card for living expenses (which is much worse than using a credit card for an emergency fund). Then work towards eliminating your high interest debt before building up your cash reserve.

  6. @Echo: I fear that people with credit card debt problems are unlikely to suddenly start tracking every penny. My idea for this situation was descriptive budgeting starting with a generous petty-cash account, and tune things from there until you get the results you want.

  7. @ Patrick: Thanks for the link, your descriptive budget is pretty much bang on with what we did after my wife went on maternity leave. I still think it’s crucial to track your expenditures though, and it doesn’t take much to write down when your bills are due and when you get paid. Often times we used to spend a bit extra on groceries or entertainment without realizing that the electricity bill is being automatically withdrawn the next day and pay day is 5 days away.

  8. @Echo: I agree, tracking your expenses is not really optional, unless you don’t mind quietly sinking into debt! I guess I just differ with the “every penny” part, as it’s beyond the point of diminishing returns for people like me who are not naturally detail-oriented. For example, I could pay myself say $100/month that I don’t even try to track, if I’ve decided I don’t mind “leaking” that much cash. The rest of my expenses are tracked precisely, but this petty-cash account lets me buy a coffee now and then without having to keep the receipt.

  9. @Patrick: I think we are on the same page. We give ourselves some spending money (say $100 cash, for arguments sake) and track that $100 as an expense, but we don’t continue to track how we spent that $100 over the course of the month, as that would be overkill.

  10. And we give ourselves cash for that very reason as it won’t interfere with how we’re tracking our other expenditures at the end of the month.

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