Credit cards have made buying and making payments a whole lot easier and convenient, especially in times of emergencies. Now that sounds like a good idea, right? Well, this convenient solution does not come free as there are some financial dangers of using a credit card as an emergency fund.
Let’s find out
Sky-High Interest Rates
If you’re paying your unexpected expenses with your credit card, then you’re simply taking out a loan to cover the expenses. Therefore, you’ll need to pay back the outstanding balance in full at the end of every billing cycle to avoid high interest.
If, unfortunately, an expensive situation arises and you fail to pay out your loan in time, the remaining balance will be carried over to the following months. This usually attracts paying high interest rates (double-digit interest rates) to the card issuer bank, meaning you’ll have an added expense to take care of.
Easy to get into huge debt
Let’s face it; double-digit interest rates could accumulate your debt pretty fast. And since there’s no guarantee that emergencies will wait until you’ve paid off your previous emergency debt, other emergencies can easily send your finances out of control.
You’ll find yourself forced to start rolling debts from one month to another, and this poses a great risk of running into huge debt that you can’t possibly afford to repay. This can also be dangerous for your credit score.
Risk ruining your chances of obtaining credit in the future
Debt utilization ratio is one crucial aspect that lenders look when evaluating the credit-worthiness of a borrower. Debt utilization ratio, simply put, is how much you have borrowed against your total credit limit.
If, for example, you max out a credit card or two to cope with your emergencies, then don’t be shocked to find your credit score drop significantly. It means you increased your debt utilization ratio and in the eyes of the lenders, you’ll appear as a larger risk to lend money too. Therefore, getting credit in the future will prove to be difficult as well as expensive.
Once your credit is damaged, it could take some time to improving it. One key milestone regarding credit that people often wonder is good or not is 650. Based on popular credit scoring algorithms, a 650 credit score is considered fair. However, resources like is650agoodcreditscore.com offer tips you can learn to increase your 650 credit score.
Your credit cards may be cancelled or limit reduced
Some people have credit cards, which they’re purposely saving for the unexpected expenses. Unfortunately, credit card issuers may cancel the cards due to user inactivity for several months. And sadly this happens without even notifying you.
Your credit card limit may also be slashed, especially if you fall behind on some payments or lose a job. Without a doubt, things can get a harder for you to fund all your emergency debt on your credit card. This can create a momentum that leads to using the available credit on other credit cards so that you can pay of your existing debt.
Quick tips to avoid the dangers of using a credit card as an emergency fund:
- Try to be a responsible user and avoid carrying balance on your credit
- Have a separate card strictly for emergency use. Just be sure to use it every so often to prevent cancellation
- Make an effort to build an emergency fund at any cost (an emergency fund that can keep necessary bills paid for 3 to 6 months is ideal).
There you have it!
