Using Credit When You Don’t Have an Emergency Fund
As I described in my last post, it’s important to have a budget that includes setting aside money for an emergency fund. Having an emergency fund is a good idea because you never know when unplanned – and sometimes unwanted – expenses will come your way. Knowing you have money set aside also gives you one less thing to worry about when an emergency situation does arise.
You may need to use your emergency fund next month, or you may not need it for years. If you’re just starting to budget your money and don’t yet have a savings account dedicated to emergencies, you still have options in the event of a sudden unforeseen expense, such as borrowing money or using credit. However, it’s important to remember that using credit will add an additional monthly payment and could put a burden on your monthly budget. Here are a few credit sources available to those in need of extra funding for an emergency.
- A bank or credit union will offer several different types of loans, and they can guide you through the process of finding the best loan for your situation. Loan rates and payment options vary and you must qualify to get the loan. It’s important to note that facing an urgent financial need is not a good time to find out if you qualify for a loan as the loan process may take several days.
- Payday loan companies are in the business of giving out quick loans, but be aware of the excessive fees and interest rates they can charge. Typically you write a check to them in advance of the payback date and they will run it through on that date. If the money is not in your account at the time they process the check, an overdraft can occur and create additional fees by the loan company and your bank.
- A credit card can be prudent for one-time expenses if you can pay it off within three to six months. Otherwise, you end up paying much more for an item than it originally cost. It’s best to pay your credit card expenses off in monthly installments even if it’s not required.
- Some companies offer a “6 or 12 month same as cash” payment plan. That can be a good option if you pay it within the stated period. If not, you pay interest from the date of purchase, which adds a significant amount to the cost of the item. This option is typically used for a major purchase, such as replacing a broken appliance, and would not be available in every situation.
When relying on credit cards as the answer to sudden expenses, there is always risk that your card balances will grow quickly and will soon become difficult to pay down. If spending on credit cards is a temptation that could affect your budget, it would be prudent to take steps toward paying off and closing the card(s) to ensure you are always moving forward financially. It’s wise to have one card you can use sparingly in a pinch or when traveling, but keeping it at home until you need it will eliminate the possibility of sabotaging your budget. It’s better to develop a habit of making a monthly deposit into your savings account before you have a need than to make a monthly loan payment, with interest, for an extended period on a loan or credit card.