Using Credit Cards as an Emergency Fund: What??
I was reading an article today about “recession-proofing your income” and when I got to a paragraph, I almost had a heart attack.
Savings accounts are safe, though yields will get stingier as interest rates fall. Rogé says it even makes sense to pull money out of an emergency fund to pay off debt. Psychologically, that’s hard to do in a shaky economy. Chances are you won’t lose your job, however, and if you do, why not run up debt then rather than pay finance charges now? If you want a security blanket, apply for a home-equity line of credit, which will probably have a lower rate than a credit card anyway. But tap it only in an emergency.
What?? Are you kidding me? I can’t believe anyone would say this is a good idea in this economy. There are so many things wrong with this statement.
- Not everyone can get a home equity loan or home equity line of credit.
- Why drain your emergency fund to pay for a credit card that, chances are if it’s based on prime rate, has a not-so-bad interest rate?
- Home equity loans or home equity lines of credit should not be used as an “emergency fund”.
- After you’ve drained your emergency fund to pay off your credit card and you lose your job and need to pay your mortgage (or rent), where are you going to get the cash from to pay it? Your mortgage company isn’t going to accept a credit card as payment!
I just can’t believe that anyone would make a suggestion like that. An emergency fund is just that: for emergencies. Personally there is no way I would ever empty (or take a huge chunk out of) my emergency fund to pay off credit card debt. I guess it’s all a matter of opinion, but I just would never do it. I feel comfortable knowing I have the cash to pay for my mortgage in case something horrible happened.
What do you think about using a credit card as an emergency fund?
I see it both ways. While having the liquidity of an emergency fund can definitely be comforting, from a pure financial perspective it can make sense for the right person.
For example, even if you are paying 9% on a credit card with a $10,000 balance, you would be paying $900 a year in interest.
At the same time if you had $10,000 in a savings account earning 3% (which you probably won’t find in todays market), you would earn $300 in interest a year. So by paying off the cards you would be saving $600 a year, and if times got hard you could technically just charge the cards again.
Again I am not saying this would be the best case for every person, but for some people it might make sense.
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Grant- for that example, it makes sense. I didn’t sit down and do the math. I guess personally I feel that I’d rather have the cash available to pay for emergencies, but that’s just me. I think people should do whatever works best for them, but definitely not use a credit card as their emergency fund instead of saving if they can. Thanks for your point of view!
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We had an emergency fund of $10,000 sitting in a short term deposit. Recently we paid it off our mortgage. Who knows whether our bank is going to survive or not at the moment? Rather pay it off the mortgage than risk losing it altogether.
So our credit card is now our ‘emergency fund’ until we build up some savings again and see what happens to our bank.
Not a good idea for those people who are careless about money, but certainly convenient at times.
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Sue- I think responsible people can use some of their credit cards as emergency funds if they absolutely have to. After all, it’s better to eat than to not have credit card debt because you don’t have an emergency fund!
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