Why using your credit card for emergencies is risky
We all know life doesn’t always go to plan and things can happen that are out of our control. If you have an emergency fund, then good on you! But, if you don’t and you’re currently relying on your credit card to cover for unexpected events, we explain the financial risks you could be putting yourself in.
Your plastic is essentially a loan
Relying on your piece of plastic to cover for the rainy days is not an ideal financial move. What if you have a second or third emergency? This may send your finances out of control.
Credit cards are made for convenience, but convenience can come at a cost. It’s your responsibility as the borrower to understand the right ways to manage your finances.
You might end up with more debt
Avoid using your credit cards to pay for emergencies. The higher interest rate and other fees and charges may cost you more in the long run. If you aren’t already paying off your monthly balances in full and only the minimum amount required, piling your existing balance with a large sum of emergency expenses could lead you into further debt.
Remember, the minimum repayment on a credit card is around 2% – 2.5% of the closing balance. So, it may take you years to pay off that emergency if you only make the minimum repayment.
Your credit reputation might be affected
If your debt snowballs and you’re having trouble making the monthly repayments, not only could you incur late payment fees, you could end up with a series of late payments on your credit file, or worse – a default. Defaults can remain on your file for up to 5 years, which will affect your ability to borrow credit in the future.
Having a cash emergency fund is an important tool to help protect your credit, as well as your overall financial well-being. Here are a few tips to help you get started:
# Allocate a budget and have a savings plan
Depending on your personal circumstances, think about a rough figure you would like to save as contingency and the ways you could start the process.
# Set up a dedicated savings account
It’s hard to know how much you’re exactly saving when you have your savings and emergency fund combined into one. Separate them out so you know exactly how much you are putting towards each to give you clarity and financial reassurance.
Set up an automatic direct debit to ensure you’re always putting the allocated amount in your emergency fund every month.
# Change spending habits into saving habits
Building a savings habit isn’t an easy job, identify the unnecessary expenses and start cutting down. You should also think about ways to save by negotiating for lower rates or make the switch to another credit card that suits your financial circumstances better.
If you need to dip into your emergency fund, remember to top it up again afterwards.
If you haven’t already started building an emergency fund, read our article on what is an emergency fund and how do I build one and start saving today!