Consequences of Using Credit as an Emergency Fund

by Ryan Yates

Use Credit for Emergencies

What will you use to extinguish your next financial emergency?

Pay down your debt and build up your emergency fund.

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 Solution

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

{ 8 comments… read them below or add one }

Money Beagle July 14, 2011 at

If I had a big emergency, even though I have an emergency fund I’d probably use my credit card and then pay for it. Depending on the emergency, credit cards can offer insurance and protection on your purchase, not to mention the 1% cashback. If I have a $4,000 emergency, I’ll take a $40 reward check for my troubles, wouldn’t you?


Mike Young July 14, 2011 at

It depends on the emergency. Generally speaking, if you go to pay for a $4,000 purchase and offer cash, chances are you will get a much larger than 1% discount on your purchase. And, when you exchange the cash, it’s done. You don’t have to worry about a CC company “accidentally” not processing your payment until after your due date and all the other shady practices they use.


Ginger July 17, 2011 at

I have never had a company not process my payment, but then again I pay through the cc’s website.


Mike Young July 14, 2011 at

You also must define what an emergency is. If your dishwasher breaks, for example, and you don’t have the money to replace it, but have 2 working hands and a sink, it is not an emergency.


Ginger July 14, 2011 at

I used “credit” as part of my EF. My DH is a student and we took out a subsidized student loan and it sits in our high yield checking in case of a huge emergency. It cost us $85 and the interest we earned on it, made the $85 back in 4 months. We are still earning interest on it and that is helping build our EF. If we had an emergency I would first put it on a credit card, both for the cash back and because it would stretch the time it took to pay off the emergency another 21 days. I do not pay any interest on a credit card. This time would give me time to make cuts, sell items and make a plan. I do have about a little over a month of a true EF but my credit sure does help stretch that.


Carla July 22, 2011 at

Fabulous post!!! I can never understand why some people think an empty (or not) credit card qualifies as an emergency fund! The VERY LAST thing I’d want in an emergency is a fat cc bill in my mailbox every month! Ugh!


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