Why credit cards shouldn’t be used as a contingency fund

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While you can get a credit card as a last resort, it shouldn’t be your primary source when unplanned bills arise.

  • You can get a credit card when unplanned expenses begin that cannot be postponed.
  • Ideally, you should have savings that you can use first in the event of a financial emergency.

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Just the other day, we brought our car for an oil change, and after 45 minutes they called us back and said: “The brakes need to be replaced urgently.” And $ 500 later we had new brakes, but with them the savings account balance dropped significantly.

However, I am grateful that we had this $ 500 in our emergency fund. If this money were not available, we would have no choice but to pay for auto repairs with one of our credit cards and pay off over time, since brake failure is not a problem that can wait.

Unfortunately, some people don’t have big savings and have to rely on credit cards for unplanned bills. To be clear, this is a sensible path to take when you are unexpectedly stuck in a situation like this. If you come home and find that your heating system is out of order and it is mid winter, you need to fix it immediately. If you don’t have the $ 1,000 to save money, your best bet is to write off those expenses from your credit card and pay them off as quickly as possible.

But generally speaking, your credit card shouldn’t be used as a substitute for a contingency fund. That’s why.

1. You don’t want to get hung up on paying interest

If you charge your credit card and do not pay the balance in full by the due date, you automatically sign up to pay the additional costs in the form of interest payments. Going back to our example, a $ 1,000 heating repair bill could end up costing you $ 1,100 or $ 1,200 if you rent it and take time to pay your credit card. But if you have this money in savings, you can pay $ 1,000 and stop working.

2. You don’t want to ruin your credit score.

If you end up having a small credit card balance relative to your total spending limit on various cards, your credit score may not be affected. But if you still have to pay for emergency credit card expenses to the point where your balance continues to rise, your credit score could be hit hard.

The loan utilization rate is an important factor in calculating your credit rating. This ratio measures how much of your total credit limit you are using at one time. If this ratio does not exceed 30%, then you are in good shape. Credit rating damage can occur outside of this threshold.

Going back to our example, if you have to pay $ 1,000 for your heating repair with your credit card, but you don’t have an existing balance on top of that, and your total credit limit is $ 10,000, your credit score shouldn’t be affected. … But if you already owe $ 3,000 on your credit cards and add $ 1,000 to that amount, you get a 40% load, which could lead to a drop in your credit score.

Don’t rely too much on credit cards

You may face a situation where you have to charge your credit card as a last resort. What you should not I want to point to your credit cards as a reason not to create an emergency fund.

Ideally, you should have enough money in the bank to cover living expenses for three to six months. You may not receive this amount right away, but if you work towards it over time, you will buy yourself good protection against the many unpleasant financial surprises that may come your way.

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