Using a credit card as your emergency fund isn’t generally a great idea. With an average interest rate of 15.54 percent, according to the Federal Reserve, a large unexpected expense could put you in high-interest debt for months to come, if not years.
Here are some tips to do so.
Get a low-interest credit card
It’s not easy to find a credit card that has a true low interest rate. Many credit cards offer an introductory 0 percent APR promotion, but once that’s over, the rate jumps, often to an above-average level.
And since you can’t predict when an emergency will happen and get a 0 percent APR credit card right before it happens, you’re better off holding onto a card that has a low interest rate as long as you keep it.
Unfortunately, not many major credit card issuers offer credit cards with low ongoing interest rates.
If you want to go even lower, check with your local credit unions. Credit unions are not-for-profit institutions owned by their members. So, profits are typically returned to members in the form of lower interest rates and fees on loans and credit cards.
Keep a good credit history
If you can manage to apply for a 0 percent APR credit card in the midst of the emergency, that could give you time to repay the debt interest-free.
But if your credit score isn’t in the good to excellent range, you’ll have a hard time getting approved. To give you an idea of what that looks like, here’s a list of the general FICO score ranges:
- Excellent: 750 to 850
- Good: 700 to 749
- Fair: 600 to 699
- Poor: 300 to 599
If your credit score isn’t in great shape, make it a priority to improve it. Start by making your payments on time each month and getting caught up on any late payments or delinquencies.
Next, work on paying down your credit card balances, if you have any. The lower your credit utilization—your balance divided by your credit limit—the better.
Consider credit cards as a last resort
Even if you use a 0 percent APR credit card to cover emergency expenses, there’s no surefire way to eliminate the potential of you paying high-interest debt.
If you’re already living from paycheck to paycheck, it can take longer than the promotional period to pay off the bill. Also, if one emergency happens shortly after another—say, your car breaks down then your basement floods—you could end up digging yourself too deep a hole to recover in time.
Ask a family member for help
So, instead of viewing credit cards as a first responder, look elsewhere for a safety net first. For example, consider asking a family member or friend for a loan. Also, look at other financing options that may offer lower interest rates without the open repayment schedule.
Consider other loans
Personal loans and home equity loans, for instance, can offer single-digit interest rates if you have excellent credit. Plus, they offer a set repayment term that lets you know exactly when you’ll be finished paying off the debt.
Avoid payday loans
A couple of loans to avoid altogether include payday loans and auto title loans. Both of these loans typically charge triple-digit interest rates. Plus, you’ll generally only have a two to four weeks before the loan comes due.
Don’t let up on your emergency fund
If you’re thinking about using a credit card to help with emergencies, don’t let that lull you into a false sense of security.
Instead, keep working on building up your emergency fund, so you don’t have to worry about using your credit card on a rainy day.
It’s generally recommended to save three to six months’ worth of basic expenses in your emergency fund. But start with a small goal, such as $1,000, to give yourself a decent buffer.
If you’re not already on a budget, create one to help you understand where your money is going. Then, find ways to cut back on certain expenses to put toward your emergency fund instead.
It can take time to achieve even a small savings goal. But the effort is well worth it when a rainy day does come.
If used responsibly, a credit card can help you cover an emergency. But it’s rarely a good idea to bank on it. Due to the high interest rates involved and the lack of a set repayment schedule, putting emergency expenses on a credit card could end up crippling you financially.
Instead, work on building your emergency fund and consider keeping a low-interest credit card as a backup. Also, look for other sources of funds if something does happen to reduce how much you end up paying in interest.