Credit cards are an incredibly easy way to spend, making it tempting to reach for the plastic. Using your credit card when an emergency arises can be even more tempting, especially if you don’t have the cash to cover the bill. In fact, nearly 23% of respondents to GOBankingRates’ 2022 Year in Review survey said they used a credit card to cover a major financial emergency this year.
While that might eliminate your financial stress in the moment, it may not be the best decision. Credit card interest can pile up and make things worse in the long run. Plus, if you fail to make your payments, you could hurt your credit score. That could make it harder to get financing for major purchases in the future, like if you apply for a mortgage.
Despite their convenience, it’s best to use credit cards more strategically, so they don’t get in the way of your long-term financial goals.
Risks of Using a Credit Card for Emergencies
Using a credit card for emergencies comes with a few distinct risks. Here are some key risks to consider.
Credit Card Interest and Fees
The most considerable risk associated with using a credit card for emergencies is the interest and fees you may incur. Credit cards usually have significant interest and fees, including purchase APRs in the double digits. While it is possible to avoid interest charges by promptly paying the card off, you may not have a lot of cash on hand if you are using it for emergencies.
Credit card interest can add up quickly, meaning you’ll end up paying much more than you would if you had cash on hand. While using a credit card might be unavoidable in some situations, it’s likely best not to do so if possible.
Credit Score Impacts
What happens if you use your credit card in an emergency and fail to make your payments? Certainly nothing good. Payment history is one of the most significant credit score factors, meaning your credit score can take a big hit if you don’t make timely credit card payments.
Unlike hard inquiries, missed payments can have a lasting negative impact on your credit score. That can hurt your chances of getting favorable terms on a mortgage — or even getting approved at all.
Risk of Spending Beyond Your Means
This point builds on previous points, but using a credit card for emergencies could lead to spending beyond your means. Maybe that means you struggle with the balance you’ve just put on your credit. Or perhaps it enables a new pattern of overspending. This can lead to a vicious cycle where you charge new purchases and pay more cash for your credit card bills.
Things To Do Instead in 2023
While using a credit card during emergencies is not preferable, there are plenty of actions you can take instead in 2023. Here are a few ideas.
Build Up Your Emergency Fund
Building up your emergency fund should be priority number one if you think you would use your credit card in these situations. Nothing beats having a reserve of cash you can use when things don’t go according to plan.
Building up your emergency fund may seem like a difficult task, however, especially if you are living paycheck to paycheck. Just remember that no amount is too small, as many online high-yield savings accounts have no (or very low) minimum balances.
Even if you set $50 aside each month, that will be much better than nothing. Any amount you can set aside will inch you closer to financial security. If you are able to increase your income later, you can always increase your emergency fund contributions. However, starting where you are is vital as a way to establish healthy savings habits.
Use a Balance Transfer Card
If you already have a significant amount of credit card debt, you might consider using a balance transfer card. These credit cards are a temporary solution, but they can be helpful if you need to pay down existing debt.
These cards give you a low or 0% introductory APR, often for more than a year. During that time, you can move your credit card debt to the balance transfer card and work to pay it off. That can help you shift your focus away from being overly reliant on credit cards and instead using cash when the unexpected happens.
Don’t Spend Beyond Your Means
Lastly, avoid spending beyond your means. There are many ways to spend within your means, such as reducing your food costs to canceling subscriptions. Depending on your income, it may require you to reframe how you think about needs versus wants. You may think of something as a need, but if you can live without it, then it is technically a want.
Of course, this kind of framing becomes less important as your income increases. But for the time being, it may be necessary to keep your spending in check to increase your cash on hand.
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