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Should You Rely On A Credit Card For Emergencies?
by
Keith Rawlinson
Volunteer
Budget Counselor
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Many times, when I tell someone you
need savings in
order to be ready for financial emergencies, they tell me that they
just use their credit card for emergencies. Is it a good idea
to
use a credit card to deal with financial emergencies? No it
isn't, and
let's talk about why.
By definition, a financial emergency is a
time when you suddenly need money to deal with an unexpected expense.
By definition, the word 'credit' in credit card means that
you
are being extended credit; in other words, you are borrowing money.
So, if you rely on a credit card to handle financial
emergencies,
you are by definition borrowing money at a time that you are already
having financial problems. Instead of having just one stressful,
financial event to deal with, you now have two--the financial emergency
and going further into debt to deal with it. This alone
should
tell you that relying on a credit card for emergencies is not a good
plan. But, just in case you aren't convinced, let's now
discuss
exactly why it is a bad idea to rely on a credit card to deal with
financial emergencies.
No Control
For one thing, when you put a charge on a
credit card, you have no control over what interest rate the credit
card company charges you. In fact, if you read the fine
print,
the credit card company reserves the right to change the agreement at
any time. The only thing you have to do to 'agree' to the
change
is use your card after the change has been implemented by the credit
card company. And since almost no one ever reads the fine
print,
most of the time you don't even realize a change has been made.
The interest rate may be high or it may be low, but there
will be
interest charged. So, not only are you trying to deal with a
financial emergency, you are now paying interest on top of it--again,
going further into debt at a time that you are trying to take care of a
financial problem.
Make
The Payments--How?
As
I said at the beginning of this article, the way to deal with financial
emergencies is to have money saved for dealing with financial
emergencies. If you don't have emergency savings and you put
financial emergencies on a credit card, you are going to have to make
extra credit card payments later--starting the very next month in fact.
Well think about it, if you are so broke that you have no
money
in savings and you have to put a financial emergency on the credit
card, where is the money going to come from to make those additional
credit card payments? Don't forget that it can takes years to pay off a credit
card
if you are just making the minimum payment. So, if your car
breaks down, for example, and you put $700 on the credit card to pay
for it, you are going to be paying off that car repair for years!
It is possible that you may not even sill have the car by
then
but you'll still be making payments on a car repair for a car you don't
even have anymore! And if your money is so tight now that you
are
broke and have no savings, just imagine the stress of having to come up
with money to make the additional credit card payment. If you
were able to make the additional credit card payment later, then you
should be able to put that extra money into savings now, right?
So, if you don't have extra money right now to put into
savings
every month, then you aren't going to have extra money later to make
the increased credit card payments.
Problems Just Keep Piling
Up
The
stress is increased even more if another emergency comes along before
you pay off the last one. You put the $700 car repair on your
credit card. In a couple of months the same car needs a new
water
pump so you put another $350 on your card. A few months
later,
the water heater in your home goes out and has to be replaced.
Since you use a credit card for emergencies, you put another
$300
on it to replace the water heater. Then there's the $900 trip
to
the emergency room. You now have $2,250 on your credit card
in
less than a year. What about next year's emergencies?
What
about the year after that? What about if an even bigger
emergency
comes along this year? Do you see how fast the credit card
debt
piles up when you rely on a credit card to handle financial
emergencies? Plus, you're going to be stressed over the next
few
years trying to pay off all of these financial emergencies while you
continue to add new ones to the credit card balance. Trust
me,
for most people this situation gets out of hand very quickly.
Before you know it, you have more debt payments than you can
make. Once you're in that situation, the very next financial
emergency that comes along will end up being a financial disaster for
you and your family.
The Solution
If
you are relying on credit cards to deal with financial emergencies,
then you need another solution. Actually, the fact that you
are
relying on credit cards to pay for emergencies shows that there are
other problems in your finances. If your finances weren't so
tight, if you were not broke, you would be able to save up money to
handle emergencies. If you have little or no money saved up,
then in order to be able to deal with financial emergencies, you need savings and
you need a plan.
The fact that you are unable to save up for emergencies shows
that you are spending every penny that comes in. Most likely
you
don't even really know where it is all going--it's just gone at the end
of each month. That's where having a plan (a budget) comes
in.
It allows you to plan and control your spending and that
frees up
money to go into savings each month. Once your savings builds
up,
you are ready to deal with financial emergencies by paying cash instead
of using a credit card.
What About The
Convenience?
Yes,
using a credit card to pay for emergencies is very convenient
especially if you are away from home at the time you need it; however,
a credit card is not the only way to have that convenience.
Once
your savings starts to build up, just have your bank link that account
to a debit card. The card works exactly the same way as a
credit
card, but the money comes directly out of your savings--no interest,
and no payments. And as long as it is a branded debit card
(Visa,
Master Card, etc.) you have the same fraud protection you would have
with a regular credit card. Since each card and each bank is
a
little different, be sure to check with your bank for the details.
So remember, you don't
need a credit card to deal with financial emergencies, you
need savings and
you need a plan.
Please know that all of the thoughts, information,
suggestions
and techniques given on this site are nothing more than the author's
opinion on
the matter being addressed. Do further research before making
any decisions.
This article copyright © 2007 by Keith C. Rawlinson
(Eclecticsite.com). All rights reserved.
This article may be
copied for non-profit use including newsletters, bulletins, etc.
as long as you
first get written permission from the author and full credit is given
which includes the author's name
and the name of this website.
