Should You Rely On Credit Cards For Your Emergency Fund?

Lately, I’ve been hearing more and more about families relying on credit cards for their emergency savings fund. This is something that scares me as while credit cards may work for some, I believe that emergency savings funds are a better solution for the average person. Whatever emergency fund amount you decide on, it’s better than nothing…

Michelle Schroeder-Gardner

Last Updated: April 6, 2020

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Credit Cards For Your Emergency Savings Fund AmountLately, I’ve been hearing more and more about families relying on credit cards for their emergency savings fund.

This is something that scares me as while credit cards may work for some, I believe that emergency savings funds are a better solution for the average person. Whatever emergency fund amount you decide on, it’s better than nothing in my mind.

As I stated in the article Everything You Need To Know About Emergency Funds, 26% of Americans have no emergency fund whatsoever.

Also, only 40% of families have enough in savings to cover three months of expenses, with an even lower percentage having the often recommended six months worth of savings.

There are many things you should think about when it comes to whether or not you should use a credit card as your emergency fund.

 

What’s your financial situation?

Different people need a different emergency fund amount.

Some of the things you will want to think about when determining your emergency fund amount is the stability of your job, your income when compared to your expenses, whether you own a house and/or car or not, your health, and more.

Basically, the “riskier” your situation, the larger the emergency fund you will most likely want. If your situation is quite risky, then using a credit card for your emergency fund may be a bad idea because there is a large chance you may rack up credit card debt that you are unable to pay off whenever an emergency arises.

 

How much risk are you willing to take on?

By relying entirely on credit cards, you are going to be taking on a lot of risk.

You never know if something may come up, how big the expense may be, and whether or not you will have enough credit to fund the expense.

Plus, the interest rate on your credit card may hover somewhere near 25%, which can make for an expensive bill if you are unable to pay your credit card bill before interest accrues.

 

When does using a credit card for your emergency fund amount make sense?

Now, I understand that different techniques work for different people. There are situations where using a credit card for your emergency savings fund may not be a completely bad idea. If you know that you can pay off a large expense within one month (such as if you have a large income but a low level of expenses), if you have a lot of credit card debt at high-interest rates that you are trying to pay off (your money may be put to better use by paying off your debt first), and so on.

However, the problem with this thinking is what happens if you lose your job? Many have emergency funds that exist so that they can support themselves if they were to lose their job. What would happen if you relied on credit cards but lost your main source of income?

It would lead to a lot of credit card debt. Unmanageable credit card debt…

 

Having a “real” emergency fund can be much more worthwhile.

There are many other reasons to have a fully-funded emergency fund:

  • An emergency fund can help you if you lose your job. No matter how stable you think your job is, there is always a chance that something could happen where you may need money fast.
  • An emergency fund is wise if you don’t have great health insurance. This is another reason why we have a well-funded emergency fund. We do not have the greatest health insurance, with our deductible being over $12,000 annually. Having an emergency fund can help protect us if something were to happen to either of us.
  • An emergency fund is a good idea if you have a car. You just never know if it may need a repair.
  • An emergency fund is a need if you own a home. One of the lucky things that homeowners often get to deal with is an unexpected home repair.
  • An emergency fund can protect you in many other areas as well. This can include if you have a medical cost for your pet, if you have to take time off work for something, you need to go somewhere far to visit someone who is sick, and so on.
  • An emergency fund is always good to have because it can give you peace of mind if anything costly were to happen in your life. Instead of building onto your stress because of whatever has happened, at least you know you can afford to pay your bills and worry about more important things.

As you can see, there are plenty of positives of having an emergency savings fund. However, I know that different things work for different people and that some prefer to use credit cards in the case of an emergency.

 

What do I think?

I think everyone should have some sort of emergency savings fund. Even if you can only manage $500 to $1,000 right now, that is better than nothing. $500 to $1,000 can still most likely help you by for at least a little bit. Plus, you can still put money towards high-interest rate debt after you build up your specific emergency fund amount.

My problem with using credit cards as your sole source for an emergency fund is that it may lead to more debt in some situations.

Do you rely on credit cards for your emergency savings fund? What do you think of relying on credit cards for your full emergency fund amount?


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Michelle Schroeder-Gardner

Author: Michelle Schroeder-Gardner

Hey! I’m Michelle Schroeder-Gardner and I am the founder of Making Sense of Cents. I’m passionate about all things personal finance, side hustles, making extra money, and online businesses. I have been featured in major publications such as Forbes, CNBC, Time, and Business Insider. Learn more here.

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  1. I couldn’t more with your conclusion. We saved a small emergency fund first ($1000), then built up to a 6-month expense savings slowly over time. Cars break, houses need repairs, people get sick or laid off…emergencies are bound to happen, unfortunately, but going into big debt over it is sort of a financial emergency you could be stuck dealing with for a long time.

  2. Heck no! ๐Ÿ™‚ My emergency is relatively small (3 to 4 months of expenses) but that’s because I’m young and only support myself. If crap hit the fan, I’d just move in with my parents or gf for a while and have no expenses. Not everyone has this choice, so maybe a bigger emergency fund would be more appropriate. I still charge EVERYTHING I can to my credit cards for the points, but I also pay off in full every month. But for people getting started paying off their credit cards would be #1 priority I think and then set up a nice 3-6 month emergency fund.

  3. When possible, I pay for things on a 0% credit card (medical bills, new A/C unit, etc.) to earn the points. I figure if I have to be a real grown up and buy these boring things, I should be rewarded for them. However, I would never put more on a credit card than I had to cash to back up. Because the only thing I would hate more than having to buy a new A/C unit would be to pay through the nose on interest for one.

    1. I see nothing wrong with that. I love points!

  4. I prefer to pay cash, when you see money hang out from your wallet usually you put more attention on your spending, then I have only a prepaid credit card that I use for travels, maybe it could be a nice deal if you use a credit card that offer you cashback but probably I will not use credit card for emergency!!!

  5. I completely agree with you in that we should not rely ‘solely’ on a credit card as a source of emergency funds. While the credit card may have a large balance that will certainly not do you any good if the emergency is a breakdown in the banking or electrical system. If there is no way to withdraw funds then the credit card is rendered useless.

    I believe we should all have some emergency cash…even though I don’t even use cash!!!! I don’t want to be caught in a situation with a power outage that lasts for days and I can’t use an ATM much less a computer to get money.

    1. Janet Fazio

      A small stash of emergency cash is a great idea to include in our earthquake disaster box.

  6. I have used this technique back when I was paying off my student loans. It is unconventional for sure, but there are a lot of cards out there that have 0% interest for quite a long time. For instance the Citi Simplicity card is 21 months at 0% interest, and at the end of those 21 months you can always do a balance transfer to another 0% CC if you are still struggling. This only works if you have good credit+. My thought process is, if things are so bad off that you are not going to be able to pay back your balance within 21 months, then that 1,000 dollar savings won’t help you much.

    Just my 2 cents
    Andrew
    SHM

  7. The hubs and I have given this a lot of thought, given our problem with credit cards, as well as our small emergency fund. Currently, our emergency fund is $3,500, but it would take us 3 days to access the funds. I realize that you’re supposed to be able to access an emergency fund in cash, but for us, we need that buffer in order to not spend our EF on something frivolous. However, we’ve decided that if a true emergency arises, we will use a credit card, and the immediately schedule a credit card payment to cover the full amount of the emergency from our EF. Definitely a tricky subject, though!

    1. Different things work for different people. Not having access to it would help a lot of people I bet!

  8. Credit cards and emergency fund should not be in the same sentence unless it is to say: you should not use credit cards for emergency funds!

    If you have the cash and decide to charge the emergency expense(s) so that you can turn around and immediately pay it off that’s completely fine. But you still need the money already set aside to be able to do that. Otherwise, by putting it on a card and carrying a balance forward, you are just setting yourself up for a world of financial hurt beyond the actual emergency.

  9. Emily @ th John & Jane Doe Guide

    When I was in my early 20s, I used my credit cards as my emergency fund to pay for big car repair bills. Never again. Worst mistake I ever made. It took years to pay off the cards and rebuild my credit, but eventually I did it.

    Now I have a real emergency fund. It will cover several months. I use credit cards, but pay them off each month. Life is better.

  10. Ugh, this makes my stomach hurt. We did this after Rick was laid off in 2010 and then got a job making much less than his previous position. Not a smart idea. That great plan was what got us into tens of thousands in consumer debt.

  11. We try to keep a healthy amount in cash reserves (approximately 5 months right now). I would hate to have to use our credit cards as our emergency fund if something came up because after the interest, we would end up paying a lot more than if we just had kept the cash. Obviously, you do lose purchasing power by keeping cash in the bank so the right balance needs to be found.

    1. Yes, the right balance needs to be found.

  12. The only way I would ever advocate this is if it was a situation where you needed liquidity now but needed time to get the funds. Like if you have money tied up in the stock market that is your emergency fund allocation (something people say not to do but is probably somewhat common these days with a rising market and zero interest rates in the bank), you could pay your emergency on the card, then have time to determine what is best to sell, and have your funds in hand when it’s time to make the actual payment to the credit card company.

  13. I think that in most cases, a credit card would probably be enough. But in my case, I don’t want to carry that risk and would rather have actual cash for any emergencies that come up. It gives you more flexibility and less to worry about.

    If all of a sudden you lost your job and the market tanked, you never know about your credit card. They might lower your limit or worse if things get that bad. I’d prefer to have the actual cash sitting in my checking account.

    1. Yes, exactly! You never know what may happen job wise and a CC may not be good enough.

  14. Jack

    I can’t imagine anyone suggesting using credit cards for an emergency fund with a straight face. At least not if they have your best interests at heart.

    Emergency funds are in cash. Not stocks. No bonds. Not CDs. Not commodities. Definitely not credit cards.

    In today’s job market, anyone can get laid off at any time, and you can end up taking a year or more to find a new job, often at a lower salary.

    Personally, we keep 1 year. It’s a lot of cash, but with only one income at the moment, we need the extra cushion. Sure makes it easier to sleep at night.

    1. Yes, it definitely helps us sleep too!

  15. Amy @ DebtGal

    Having done so in the past, I most definitely do not recommend it. Having money in the bank – even if it’s not very much – brings peace of mind.

  16. That is sad about your neighbor but great that you are there to help.

  17. Absolutely not!

    If anything I use credit cards only when I’m travelling to non-EU countries so for example when we went to Asia last year, we transfered our saved up spending money onto the credit card and used that. We knew that we were going to travel to Thailand, Indonesia, and Qatar for just under 30 days so we saved up in 2.5 years and had a great time doing all the thjings that we wanted to do and enjoying every moment.

    We did have an emergency moment as we missed a flight and had to go to Korea instead. It’s a long story LOL! Happily, we still had some holiday money on the card and used that.

    1. I use credit cards almost every time I travel, just in case.

  18. A credit card isn’t even on the same planet as an emergency fund. It’s scary to think some people rely on this as their emergency action plan. If anything, it could just make a bad situation worse and it gives a false sense of security. As you pointed out, interest rates can be pretty astronomical in some cases and they are only likely to increase in the years ahead. Emergency savings should be priority number one for everyone who has an interest in improving their financial situation.

  19. I can see why some people would do it, but I couldn’t. Once the emergency is taken care of you still have to pay the credit cards off. Another problem is that your emergency could cost more than your credit limit. I think having a cash emergency savings is the best option.

  20. Wow, that “option” never even occurred to me. I agree that relying on credit cards as an emergency fund is the worst thing someone could do. Think about it – so in an emergency financial situation, you are not only going to max out your credit cards, but now also owe the crazy interest on top of it? Just doesn’t make sense. Only saving, the old fashioned way, will create the emergency cushion needed.

  21. I have a pretty big savings account, which I’m looking to start to put to use soon. I want to invest some in mutual funds, some into buying a car and eventually, once it’s larger, I’d like to buy a house here with it. I’m probably looking to buy the house in cash, without a mortgage, just to save hassles/costs. I think my goal will be to never let my savings/emergency fund drop much below $30,000. That’s a year’s worth of basic expenses, for me. Because the industry I’m in could change at a drop of a hat, I’d like enough money to buffer me until I built up something else. I keep it in my savings account as it provides the best rate of return, while being super accessible. Do you keep increasing your emergency fund?

    1. My emergency fund will actually be getting lowered soon since we no longer own a home.