It is not uncommon when you hear about people using their credit cards for emergencies. For some, they even believe that this is the whole point of having their cards. Some people can make it work. But others, it signals the start of their financial problems. This is the reason why you hear people blaming their cards for their financial misery.
But you have to remember that your credit cards cannot dictate how you spend. They are merely credit extended by your lender for various reasons. One is having a great credit score and you get pre-approved credit cards in the mail. Another reason is having a good relationship with your bank where you keep most of your accounts.
At the end of the day, you decide how you use your credit cards. Once you do, you might want to rethink using your credit cards for emergencies. Remember that this is all in your control. You cannot go blaming your credit cards for your financial problems. It is just a tool you use to hopefully help you manage your finances better.
You might say that these are extraordinary times and that’s true. The challenges brought by the on-going pandemic are tough. The healthcare facilities are trying their best to provide care to patients all while people are trying to figure out how to make a living. The NY Times said that jobs lost totaled to that of the Great Depression and Great recession combined. If you are now thinking about using your credit cards for your emergency needs, here are a few things to remember.
You are getting a short-term loan
Always keep in mind that every time you use your credit cards for emergencies, you are essentially taking out a short term loan. Over time, you might have thought about your credit limit as part of your disposable income every month. You go about using it and including the limit in your budget overlooking the fact that it is a loan from your lender.
That being said, you always need to proceed with caution when using your credit cards. For one, credit cards have a high-interest rate. Not to mention that several fees and penalties come with the non-payment of your statement. You could be looking at a huge total amount for the next few months when you start to miss payments.
This is one of the reasons why you have to make sure you only borrow what you can pay in full every month. If you leave a balance, your lender can start adding fees to future payments. Of course, there are times when you can make interest-free installments on purchases you charge on your card. But make it a habit to only charge what you can pay-off when your statement comes in.
There is a higher chance of not looking at other alternatives
One of the biggest things you might not have realized when using credit cards for emergencies is how complacent you can get. You might overlook other options you have simply because you have your credit card with you. Rather than exhausting all efforts to solve your problem, you are content with just using your credit card cover for your need.
Take your food costs for example where it is easier to simply use your card to pay for your groceries when your income is down. There is no denying that this is an essential need but you can put in the work to lower your food costs. One is to try and cook your meals at home so you can order ingredients in bulk. You can also try using coupons to help you save money with your food expenses.
You increase the chances of going deeper into debt
Using your credit cards for emergencies can lead to more debt. This normally happens when you use your credit card but you have no way of paying back the full amount at the end of the month. Remember that using your credit cards does not put you in debt. It’s when you start to miss out on payments when your financial problems become more challenging.
Your old cards could have lowe limits or canceled altogether
You could be taking financial emergencies lightly because you know you have a couple of credit cards in your drawer that you haven’t used for a while. It makes you confident in knowing that if you ever get into a tight money situation, you can easily get those cards and charge for your expenses. What you might not realize is that if you haven’t used your card for a long time, your lender could have made a few changes to it.
For one, your credit card might not be active anymore. If you have not been using it for an extended period, your lender could have closed your account altogether. It is also possible that you have accumulated annual fees on your card. That could have grown into a sizeable amount with fees and penalties from the non-payment of your card.
If you don’t use your credit cards, you also might be surprised that your card details have changed. You might even have a different interest rate and even a smaller credit limit. CNBC shares that even consumers with a good credit score can see a reduction in their credit limit if their cards are unused. This can put you in a difficult situation especially if you counting on a higher limit.
A couple more emergencies could send your finances into a downward spiral
You might be able to use your credit cards for emergencies if it was a one time need. Where you would have a lot of time in between to help you recover and pay back what you charged on your card. But what if another emergency happens and another and another? You are then forced to use your credit card again and again.
This leads you to a downward spiral and put your finances in the red for a longer time. Once this happens, it could take a lot longer time to recover financially. If you do not get a handle on this, your balance will continue to balloon every other month. You can consider repayment programs like debt consolidation to help you get back on the right track.
It will be more challenging to build your emergency fund with huge credit card debt
A lot of these scenarios point to one thing – having your emergency fund to help you through difficult times. But if you have been using your credit cards for emergencies, it will be a lot more difficult to build your reserve funds. The reason is that you will be too busy paying trying to pay back your cards than saving for emergencies.
As you pay down your cards, you are leaving your finances exposed. When another emergency hits, you still do not have an emergency fund saved up. You then go through the same process all over again. This can be financially and mentally draining on your part. This is why you need to limit the use of your credit cards when you get into trouble.
It is not uncommon to use credit cards for emergencies buy you have to understand that this can lead to more problems down the road. This makes it all the more important to start creating that habit of saving for future needs. You never know when you will be needing it.