A Credit Card for Emergencies is a Smart (but Risky) Move
I’ve been writing about credit cards for quite a while and the stories I hear from consumers who were able to dig themselves a massive debt hole seem commonplace. For every person who suggests credit cards are great at saving you money, there are two people who will tell you how their spending got out of control. But regardless of your feeling towards carrying plastic, the smart move is to own a credit card in case of a financial emergency.
If you’ll indulge me for a few minutes, imagine you are the mother in a family of five. You and your husband work very hard to provide for your family but are struggling to make ends meet. The bills and household income are a finely balanced see-saw but today, on your way home from work, a tire blows out and you have a minor accident with the car. Insurance does not cover the damage as it’s an older car and you opted not to take on collision insurance (smart move for older cars).
After a tow to the body shop, you learn that your car will require $1,600 in repairs. You need the car to get to and from work every day and you either have to buy a new car, or fix this old one. With little cash on hand, what are your options?
- Take out a payday loan for the amount needed
- Ask to borrow money from family or friends
- Apply for a credit card and use it to pay the repairs (or to fund a used car purchase)
- Hitch a ride to and from work every day and save up for a new car
Options one and four sound reasonable but you’ll quickly learn that these are not viable. Payday loans charge enormous amounts of fees and interest and even though they can get you out of a bind, you’ll come out much worse for wear. And while hitching a ride to work every day sounds do-able, there will be many days where a ride from a friend or loved one cannot be provided, which makes for an even stickier situation.
What’s left to consider is if you have family or a friend that can help out. Money is a sore subject for many families and expecting a loan paid back by a friend can lead to problems. If you have the family you can lean on, by all means this is your best option. However for those who do not, owning or applying for a credit card will make the best out of a bad situation.
The primary benefits of owning a credit card for emergencies are three fold:
- Credit cards are immediate forms of payment. You don’t have to wait for loans to be approved or cash from family members to arrive … you can simply pull out your credit card and pay your bill on the spot.
- Credit cards offer grace periods. Most issuers offer a 25 day grace period before interest kicks in, giving you an interest free loan of sorts. Then, even after interest begins accruing, only a minimum payment needs to be made. It’s not recommended that you make just the minimum payment but if you have to, you have to.
- Using credit will help your credit score. So long as you keep your balance in check and pay your bills on time, owning a credit card is a great way to improve your credit. A higher credit score may even save you money in the future; like with a mortgage refinance or new auto loan.
Using a credit card for emergencies is not an ideal situation but for many it’s a necessary one. Whether you have excellent credit or poor credit, there are a variety of credit cards available to choose from. Always make sure to do your homework on which credit card fits your situation best and don’t be tempted to overspend, simply because you can.
This guest post comes from Michael, editor of CompareCards.com, a website which helps consumers find the best credit cardsthat fit their needs. From balance transfer to 0 credit cards, CompareCards.com offers the expert advice needed to apply for the right card.
