Nobody likes a major emergency to crop up, but who can tell about mishaps? Hence it is vital that we remain prepared, which implies saving for an emergency fund equivalent to at least 3 to 6 months of the living costs.
Some people might argue that there is no need to go for such headache of saving as the credit cards are always there. For all those who think thus, here are five solid reasons why your credit card should not be used as an emergency fund.
- Excessively high interest rate
The most apparent reason you should keep away from using a credit card in emergency is the interest that you will need to pay on the balance. In case there is a really expensive situation and you are unable to reimburse from your monthly cash flow, you will find yourself carrying the balance right to the next month. As a credit card demands double-digit interest rates, this can be rapidly expensive.
- Chances of cancellation
It is probably a wise decision if you keep a credit card for emergencies and are not using it. But if this card is your sole financial lifeline to deal with unanticipated expenses, a nasty surprise might await you.
Commonly credit card issuers cancel plastic if a customer fails to use it regularly. What makes the situation worse is that if a cancellation is due because of user inactivity, as per the Card Act of 2009, you will not get any advance notification.
- Credit acceptance is not always there
In a planet where swiping a card for purchasing small commonplace items is the usual phenomenon, you simply cannot imagine a situation where credit cards are not accepted. However, sometimes, plastic is not the way to go, and you might come to know this at the most inconvenient moment.
- You might not get credit in future
Assume that you can use your credit card to cover emergency expenses. You might be quite relaxed to know that, but if you know the consequences, it might make you immediately switch over to savings.
Once you utilize credit cards to meet the financial demand created by a mishap, your credit score would considerably drop due to the increase in the credit utilization ratio, which is the sum you owe for the credit cards in comparison with the available credit limits.
- Ultimately credit will come to an end
Life is filled with ups and downs, and some can become very difficult to cope with. If you are relying over your credit card to get out of a trying situation, it might be a very expensive process. Ultimately your credit would run out and when it happens, you will not be left with other options for resolving the crisis at hand.
Keeping all these reasons in mind, it definitely pays if you save. It is true that savings can also come to an end, but if you possess a strong emergency fund, it will give you some time to find out other possible alternatives. So, start saving from today, and make your future more secure.
