Paying for emergencies can be just as stressful as the emergency itself. Credit cards can be useful for paying surprise expenses in a pinch, so it’s no surprise that 43% of Americans with credit card debt attribute it to emergency spending. You have other options that might help you avoid accruing a high balance on your credit card, so how do you decide whether to use a credit card for urgent situations?
Read more: Ally Bank Savings Account buckets and boosters can help you save for emergencies
Disadvantages of using your credit card as an emergency fund
Using a credit card to pay for an emergency (such as a medical bill, home repair or car maintenance) can set you up for financial strain. If your balance rolls over from one month to the next, the amount you owe grows because of compound interest. Letting your balance build can make it harder to pay more than the minimum each month and could lead to debt you cannot afford.
Carrying a high balance on your credit card in relation to your credit limit could cause your credit score to be lowered. It can also indicate to lenders that you’re a risky borrower. Meaning you might not get the best interest rate should you need to borrow money.
Be sure to familiarize yourself with credit card best practices to avoid any surprise fees or interest charges.
When to consider a credit card for emergencies
If you don’t have cash to pay for an emergency, using your credit card can buy you time. The grace period between making a purchase with your credit card and the payment due date can allow you to set aside some cash before your outstanding balance starts accumulating interest.
Be sure to familiarize yourself with credit card best practices to avoid any surprise fees or interest charges.
Many credit cards offer points or cash back on certain purchases, and you can redeem these perks for things like credit toward your statement balance, travel miles or gift cards. But keep in mind that some credit card companies can freeze rewards or prevent you from earning them if you make late payments.
An alternative to using a credit card for emergencies
An emergency fund can be a great way to prepare for potential surprises ahead of time. Setting this money aside in a liquid account, like our Ally Bank Savings Account keeps your money accessible, giving you the ability to pay large expenses in full or make monthly payments without worry. And savings boosters can help you build your emergency savings further by analyzing where you can save more based on your expenses and automatically transferring extra money to your savings account.
Tips to avoid debt from an emergency
If you are in a sticky situation and have to use a credit card, do your best to avoid carrying a credit card balance. As long as you can pay your balance in full each month, you won’t accrue interest and remain debt-free.