The Smart Way to Tackle Emergency Expenses

A high-winds storm causes a tree to fall onto your roof. Your company downsizes, and you find yourself laid off for several months. Emergencies happen and they can cost money. How you pay for them can affect your finances for years to come.

If you have an emergency fund, it’s not always clear when you should use it. If you don’t have one, you may be left wondering how you’re going to pay for this.

If you find yourself debating using an emergency fund vs credit card debt, an emergency fund is almost always the better option. You can’t underestimate the value of an emergency fund. If you don’t have one, it’s time to start saving. Here’s why you should almost always use any money you already have over going into debt.

Not Everyone Takes Credit

Paying with your credit card has become incredibly common. People put even the smallest purchases on credit. For some people, it’s how they keep track of their spending: buying everything on their card and paying the balance at the end of the month.

But not everyone will accept a credit card. What happens if you need emergency repairs on your home and you need a contractor? They don’t take plastic. You’ll need to make sure you have the cash to pay them.

Interest Rates Increase Your Costs

Unless you plan on paying off the full balance when you get your bill, using your credit card will cost you. With most cards on the market charging double-digit interest rates, every time you let your balance carry over, your debt costs more. That means more of your payments are going toward interest instead of principal, and the overall costs increase. It’s always a better idea to use emergency savings than a credit card if you have the money in the first place.

You Can Hurt Your Credit in the Long-Run

When you apply for a new loan, credit card, or line of credit, lenders look at a number of factors to determine whether or not you’re likely to repay it. One of those factors is your credit utilization rate. This is the percentage of available credit that you are currently using. In other words, it’s your balances divided by your credit limit. About 30% of your credit score is determined by this rate.

If you have one or two maxed-out credit cards, you’re likely to have a very high credit utilization rate. Unless you have an untapped line of credit as well, it will be hard to qualify for new sources of credit until you have successfully paid back some of that debt.

You Have to Pay It Back Anyway

When you borrow money, you always have to pay it back – and usually more on top due to interest. If you already have the money to pay for something in a savings account, it makes more sense to use that instead of your credit cards.

Line of Credit vs. Credit Card

Lines of credit – pre-approved sources of credit from a bank – are a bit more forgiving than credit cards. The interest rates tend to be lower, and they are designed to provide cash advances for emergency expenses or major projects like home renovation. You are also only required to pay the interest down on a line of credit, rather than the principal, although doing so can leave you in debt indefinitely.