Your Credit Card Is Not An Emergency Fund

Let’s talk about this trend of people who are relying on credit cards as an emergency fund, rather than saving money. Given the state of America’s finances, this practice is problematic on so many levels.

Debt in America

The statistics on debt in America are dire.

The nation’s collective credit card debt alone has reached over $1 trillion. That’s not to mention mortgages, car loans, student loans, and other types of debt.

About 70% of Americans own at least one credit card (the average is about 3), and only 30% of credit card holders pay their balances in full each month.

This means that a large portion of the population is spending money they don’t have and paying extra money (otherwise known as interest) to banks for the privilege of doing so.

Money management in America

In addition to our high debt balances, about 78% of Americans are living paycheck-to-paycheck and beyond, including a large percentage of people who make six figures.

Twenty-six percent of Americans have no emergency fund at all.

Forty percent of people can’t cover a $400 unexpected expense.

High debt levels coupled with poor money management and lack of savings equals a recipe for disaster. We bop along thinking everything is fine, until it’s not.

As Warren Buffett says, “you only find out who is swimming naked when the tide goes out.”

Using credit cards as an emergency fund is risky

In short, your credit card is not an emergency fund. You need to have actual money available in case of an emergency.

When an emergency strikes, you want security in knowing you can handle the situation. Credit cards are risky and in many situations can’t provide the security you need.

Related: Everything You Need to Know About Emergency Funds

Using a credit card as an emergency fund can make a bad situation worse

Remember that any charges you put on a credit card must be paid back.

If you don’t have the money to cover an emergency, you likely won’t have the money to pay off the charges you make on a credit card.

If you can’t pay off the charges, interest will accrue, and interest rates on credit cards tend to be quite high—the average interest rate is 17%, but in some cases it can be as high as 30% or more.

The high interest rate plus the inability to pay the balance in full result in a difficult cycle to break. The credit card balance stays about the same or even increases as you try to pay it off.

And what if the emergency is a job loss? When you don’t have any income coming in, racking up credit card debt isn’t the best idea.

Your access to credit isn’t guaranteed

You have very little control over your credit limit, so it’s not the best place to put your trust in case of an emergency.

There are no guarantees with credit cards. The credit you think you have today could be gone tomorrow.

The bank could reduce your credit limit or close your account altogether.

If you were counting on that credit card in case of an emergency, you could be up a creek when it all hits the fan.

You could use too much of your credit on non-emergencies

One major pitfall to this strategy is that people fail to set aside a specific credit card for emergencies.

They go on using their credit cards as usual. Then, an emergency hits.

If you already have charges on your credit card, you may not have enough available credit to cover your emergency.

This would not be an issue if you had cash saved.

What should you do instead of using credit cards as an emergency fund?

You should save cash to use in case of an emergency.

The size of your emergency fund will vary depending on your situation.

Traditional advice recommends 3 to 6 months of expenses, but you might decide on something different.

For example, Mr. TMG and I decided to keep 1 month of expenses in our emergency fund while we finish paying off our debt. Once the debt is gone, we’ll bump that amount up.

Related: Everything You Need to Know About Emergency Funds

Check out this post for emergency fund suggestions based on different hypothetical situations.*

*This is provided for informational purposes only. Please see my disclaimer, and be sure to hire a professional for advice based on your individual situation.

If an emergency happens, your emergency fund would help cover the expense. Rather than adding to your stress by increasing your debt burden, you can reach for the money you’ve set aside.

Money is much safer than a credit card. The same risks aren’t present.

This also means you won’t earn anything on your emergency fund, but that’s okay. Your emergency fund is not an investment.

You’re not trying to get a return on this account. You want a safe place to park some cash, such as a money market account.

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Having a pile of money ready to go in case of an emergency gives you a sense of security that a credit card simply can’t. If you don’t already have an emergency fund in cash, I encourage you to start saving today.

Do you have an emergency fund? What do you think about using a credit card as an emergency fund?