Most of us have heard that we need to establish an emergency fund that can withstand 3-6 months of typical family expenses. This can help you stay afloat when an unexpected emergency arises. The trick is to build up your emergency fund over time. Establish yourself as a saver and every month put a little away in an emergency fund account that will accrue interest. A credit card is not a fund you build up. It can be used in an emergency, but it is not and should never be considered, an emergency fund.
The reason you have an emergency fund is so it can be used instead of going into debt. A credit card actually puts you further into debt and so defeats the purpose of the emergency fund. When I was in college I got a student credit card “just for emergencies” and, well, we all know how that turned out. When you do use the credit card, you end up with additional debt due to the interest you pay on the card’s balance. Sometimes this interest payment can be quite high. You can actually exacerbate the original emergency due to taking on additional debt. Rather than pay interest on a credit card, earn interest in your emergency fund.
Another problem with credit card usage during an emergency is that you are required to make monthly payments. If the emergency is particularly nasty, this might make even the monthly payments a problem. Keep in mind that when you use your credit card you will need to begin making monthly payments right away. If you instead use an emergency fund to handle a financial emergency, you can wait until circumstances improve before beginning to replenish your fund. This can ease your stress levels during the emergency, knowing you don’t have to make payments.
One final worry about using your credit card as an emergency fund is that you set yourself up to create the habit of going into debt for unexpected events that crop up. This is not a good habit for your financial health. You don’t want to fall into the trap of using debt to solve your problems, as it will just lead to more and more debt.
I don’t mean to say that you should not have a credit card, or that you should never use it. In fact there are times when having a credit card can be a real life saver and if you use them right you can get cash back like the Discover More card. There are times when you may not be able to get to an ATM machine, or you just need some extra money for a small emergency. Credit cards offer flexibility and often have purchase insurance plans which can be very useful. The key point to remember is that having a credit card for an emergency is not the same as relying on your emergency fund. If you do use your credit card, be sure to pay off the entire balance as quickly as possible. You can even use money from your emergency fund to pay off the credit card balance so that you don’t pay additional interest charges. Just make a plan to rebuild your emergency fund as soon as you can.