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A cash emergency fund is better than a credit card

On Behalf of | Feb 7, 2020 | Chapter 7 Bankruptcy

Some people tend to view their credit cards as emergency funds. If something goes wrong, they know they can just charge whatever they have to.

Maybe you tend to spend $4,000 every month, for instance, and it’s all in your budget. Your card, though, has an $8,000 limit. If your car breaks down and you need to pay $3,000 for repairs, you know you can just run your card at the mechanic’s shop.

This is a risky way to approach your finances. You’re far better off to have a cash emergency fund that you put a small amount of money in every month. The longer you save, the more you have when that unexpected expense hits.

With a cash account, even if you drain the account, that’s all you spend. With a credit card, if you can’t pay it off, now you have high interest rates. They can make it hard or even impossible to pay off what you owe. At best, it takes time. At worst, you just keep making the minimum payments and treading water as you pay off the interest.

But, either way, you spend far more on that emergency than you had to. The credit card loan makes a dire financial situation even worse.

That said, emergencies do happen. You may not feel you have any choice. Things outside of your control — like losing a job — could dictate your financial decisions. As your debt mounts, make sure you understand what financial options you have. No matter how poorly things have gone, there are always steps you can take to focus on your future.

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