Why Using Your Credit Card for Emergencies is Risky

Having a credit card to use in case of an emergency sounds like a good idea. If you’re ever in a bind – say your stove needs replacing or you need major car repair – you could pay for it with your credit card. But, depending on a credit card to cover unexpected expenses isn’t the best financial move.

A credit card is a loan.

This is stating the obvious, but think about what that means. It means you’re taking out a loan to cover an emergency expense because you can't afford to pay it for out of pocket.

It means you’ll have to pay the money back. If you can’t afford to pay it back all at once, it means you’ll have to pay interest. If you weren’t already paying monthly on this credit card, you’ll have another monthly expense to fit into your current spending.

You’re less likely to look for other solutions.

Having a credit card as your emergency fund can make you lazy. You may not look for the DIY solution, or negotiate a lower price, or shop around for better pricing because you believe you already have a viable solution – your credit card. What if you were spending cash from your emergency fund instead of using your credit card? You’d probably want to hold on to as much of that cash as possible, so you’d probably try to find cheaper alternatives to fixing your problem.

You’re at risk of going into debt.

Technically, you’re already in at least a little bit of debt once you put a balance on the credit card.

But, making one credit card charge, even for an emergency, can create a momentum that leads to other credit card charges and possibly more debt than you can afford to repay. You have to guard against the temptation to make credit card charges on top of your current balance and resolve not to make additional credit card purchases until you’ve paid off your emergency debt.

A dormant credit card may have been cancelled.

If you have a credit card that you’re saving for emergencies, it could get cancelled after several months of not being used. Or, the credit card issuer may reduce your credit limit, making it harder to fund an entire emergency on your credit card. You may end up using the available credit on several different credit cards to pay for your expense. Relying on a credit card for an emergency puts you at the mercy of the credit card issuer, who may or may not decide to extend you enough credit for your emergency.

A second or third emergency may send your finances out of control.

There’s no guarantee that emergencies will come one at a time and only after you’ve conveniently cleared the credit card balance from your previous emergency. They’re emergencies, after all, they occur at random. What if another emergency happens and your credit card is already maxed out from the first emergency? Your list of options gets shorter as your credit card balances increase.

It’ll be harder to build up an emergency fund with a credit card balance.

Saving money can be tough, which may be part of the reason that you don’t already have an emergency fund. It will be even tougher to build an emergency fund once you’re making minimum (or higher) payments on a credit card.

Imagine if you’d had emergency savings before the emergency. Then, the money you’re now spending on a credit card payment (and interest!) would have been going back into your savings and possibly earning interest.

If you don’t have enough money in savings to cover the unexpected expense at the time the emergency occurs, you don’t have many options. So of course, borrowing via credit card is better than many alternatives, e.g. overdrafting your bank account or taking out a payday loan. You can be certain that, in life, financial emergencies will arise. And, since you know that it’s better to pay for these out of pocket, rather than put it on a credit card, now’s the time to start building an emergency fund.

You may not be able to put much money in your emergency fund, but start where you can; $25 or $50 a month adds up.

Set a goal for your emergency fund, e.g. $500 or $1,000, and work toward it. Don’t stop there; the ideal fund is six months of living expenses, so make that your long-term goal.