I am learning the hard truth why a credit card is not an emergency fund. For the better part of our married life, we have been using credit card as a tool to reap some rewards in miles and free companion ticket each year to any U.S. destination. Our credit score has been great because we have been wise paying our balance in full every month.
While a credit card can be a great tool when an emergency occurs, experts say that regularly incorporating your credit card into your everyday spending can be a smart financial habit. However I feel like this should come with a loud disclaimer to remind people of the pitfalls of not making smart choices when it comes to using credit cards.
Four years ago we purchased our very first home and we were ecstatic. We were living the “American Dream” and it was everything for us two immigrants to own a slice of that pie. The following year we were hit with taxes and expenses that knocked us off our well planned financial feet and I must admit that I did not handle the circumstance with wisdom.
Do you know that money doesn’t care about your emotions? I am finding that out and the past three years have proven to be the hardest years financially Hubby and I ever experienced and unfortunately we found ourselves using our credit card as an emergency fund. As the CFO (Chief Financial Officer) of our home, I found myself in denial about the path that our finances were taking.
One payday I was taking care of the bills and when I looked at the credit card statement, I was furious. I was so mad at myself, not the credit card company, for allowing our hard earned money to fly away to credit card land. One of the most important features of a credit card is the interest rate and to say it affects your monthly balance is an understatement and the reason why you want to minimize or even eliminate that extra cost every month if possible.
That particular month, our finance charge made me call an emergency finance meeting with Hubby to talk about how to get our finances back on track. Finance charges are calculated in a variety of ways depending on your credit card terms. Some credit card issuers calculate finance charges based on your average daily credit card balance, the balance at the beginning of the billing cycle, or the balance at the end of your billing cycle. Finance charges may or may not include new purchases made on your credit card.
With most credit card balances, you can avoid interest by paying the full balance listed on your credit card statement. With certain balances, like cash advances and balance transfers, it isn’t so easy to avoid paying interest because those balances don’t have a grace period. In that case, your best option is to minimize your interest charges by paying your balance off quickly.
The more you understand your credit card interest rate the better you can use your credit card to your advantage and save money on interest in the long run. Having a credit card as your emergency fund can make you lazy and that’s what happened to Hubby and I. At the end of the meeting, we realized that we needed a set plan in place for saving like we had before we purchased the house because once we moved in, the homeowners honeymoon took over and so did the “secure” feeling that our savings will last forever.
Now we understand the importance of guarding against the temptation to make credit card our emergency fund and put a plan in place to save instead, no matter how small the amount. We remembered the feeling that we had when we had emergency savings before the emergency and we are now determined to have the money we are now spending on the credit card payment with interest to go back into our savings and possibly earn interest for us and not the credit card company.
According to a 2017 GOBankingRates survey, more than half of Americans (57 percent) have less than $1,000 in their savings accounts. That motivated us to set our current goal for our emergency fund to $1,000 and work toward it. It can be discouraging sometimes because life happens but it’s all about starting where you are and focus on where you are going. A little bit every month does add up so do not despise those small steps toward saving what you can. The ideal emergency fund is six months of living expenses so we are making it our long-term goal and until then we are trusting that the hard work will pay off in financial freedom and not interest charges.
