Emergency Credit to the Rescue

emergency creditLife is unpredictable. That’s probably no surprise to anyone. And it’s probably also pretty obvious to say that when life does throw you a curve ball, it’s usually going to cost money.

Unexpected medical bills, major home repairs, a car accident: these events can easily wreck havoc on your budget and savings.

And they don’t just cause problems for people without savings.

A Bankrate recent study found that only 38% of Americans could pay for unexpected expenses — such as $1,000 for an emergency room visit or $500 for a car repair — using their savings.  The other 60%-plus would be forced to use credit cards, borrow from friends or family, or find savings by reducing the cost spent on other things.

The best we can do is try to follow the Boy Scout motto and “Be Prepared.”

While having an emergency savings fund that can cover 3-6 months of living expenses in the case of emergency is the best policy, it’s simply not possible for most people to build-up that kind of account overnight.

If you don’t have access to a fully-stocked emergency fund, an emergency credit card is a smart secondary option.  To account for life’s unexpected costs, stashing away one credit card with no balance on it can be a lifesaver.

Imagine having your laptop stolen at college when you have a huge assignment due that week.  Or coming home from vacation to find your roof leaking.  These are just a few circumstances in which your emergency credit card can be an affordable and easy way to deal with an unfortunate circumstance beyond your control.

When to Use an Emergency Credit Card
Key to the concept of the emergency credit card is keeping to the definition of what constitutes an emergency. Having to replace your car’s transmission or emergency travel due to family illness are legitimate emergencies. Needing to join your friends for a weekend ski trip is not a real ‘need’ at all. And it may take discipline to avoid the lure of using your card for “wants.”

Outside of a savings account dedicated for emergency spending, an emergency credit card is one of the most convenient and immediate ways to access funds. Taking money out of a money market or IRA can cost you in penalties. Tapping into the equity of your home takes more time than one has by definition of the term emergency.

In addition, emergencies such as unemployment and disability are the types of situations that may disqualify you from getting a loan, so acquiring an emergency credit card while life is good is smart planning.

What to Look for in an Emergency Credit Card

1. Make sure that you choose a low-interest option with no annual fees.  You don’t want to be caught paying extra money on a credit card you only plan to use when times get truly tough.

2. Lock-in a large enough spending limit to be useful in an emergency.  There’s no universal answer to the question of how much that needs to be.  If you rent instead of owning a home, or have a low deductible health plan, or don’t own a car, you might not need as large a line of credit as someone who is on the hook for replacing a broken water-heater or fixing a bad transmission. Consider your risk, your assets, and your paycheck and plan accordingly.

3. Be conscious of your credit.  Don’t add another card if you’re working on shoring up your credit score or are eyeing a major purchase down the road.  And be sure to make minimum payments to avoid late fees that can ding your credit score.  In a best case scenario, your emergency card is used as a temporary bridge until you can save what you need.

A good question to ask yourself is, if you had a $2,000 unexpected expense to cover immediately, how would you pay for it? If have an emergency credit card neatly filed away at home, you’ve got an answer.

Photo by Stockmonkeys.com / CC BY 2.0

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