These are common sense financial goals that should be on everyone’s list. No matter which goal you decide to conquer first, everyone would agree that both are extremely important to financial success.
But what about using your credit card as an emergency fund?
I know it sounds like a bad science experiment gone wrong, but people are employing this tactic all over the country and suffering the consequences.
Can it ever be stopped?
Today we’re taking a stand against credit of any kind that tries to disguise itself as an emergency fund. No matter if it’s credit cards, bank loans, or payday loans, you should never use borrowed money as an emergency fund.
Reinforcing the Debt Cycle
You know that you need an emergency fund, but you also know that growing an emergency fund takes time.
What happens when your patience runs out? You rely on credit to “save” the day. Bad idea!
Let’s just state the obvious to explain why: having an emergency fund is critical because it keeps you from digging yourself deeper into debt when you’re faced with an actual emergency. Your emergency fund is there to sustain your financial situation throughout unemployment or car repairs or any other financial crisis.
One of the worst consequences to using credit as an emergency fund is that this practice continually perpetuates debt. It’s almost as bad as using your credit card’s convenience checks to pay the minimum payment on your other credit cards.
When you use credit as an emergency fund, you’re not sustaining anything…instead, you’re continuing the debt cycle.
Emergency funds are meant to help break that debt cycle. So it’s preposterous to use credit (what will essentially become debt) in an attempt to break the cycle.
Using credit as an emergency fund reinforces the debt cycle instead of breaking it.
Oppressive Reality of Interest
When you use credit to cover emergency costs instead of using an emergency fund, paying interest will be an ever-present battle that continually increases the amount of money that you owe.
Currently in America, the average credit card interest rate is hovering close to 16%. This means that even relatively small emergencies can wipe out your financial progress and send you back to square one with loads of debt and no end in sight.
Even if you double your minimum monthly payment, the consequence of your newly-acquired debt will be an expanding gap in your available income.
Easier Every Time
Another consequence to using credit as an emergency fund is that it will get easier every time you do it. The easier this practice gets, the more frequent it will occur.
And every time you commit this financial crime, your definition of “emergency” will change to include smaller and smaller inconveniences. Before you know it, you’re labeling clothes and vacations as emergencies.
The idea is simple, but the follow-through takes discipline. The solution to using credit as an emergency fund is to stop using credit. Don’t even consider it! Instead, take the time to build up a proper emergency fund that will be able to withstand anything life throws your way.
Photo by Thing Three