financial emergency

How to Use a Credit Card for an Emergency Without Drowning In Debt

Dan Rafter — Mon, 09 Oct 2017 09:00:05 +0000

You know you're supposed to have an emergency fund to help pay for big, unexpected expenses such as a leaky roof or a busted transmission. But what if you don't have an emergency fund? Or your emergency fund balance is too low? You may need to rely on a credit card instead.

Using credit cards to handle financial emergencies isn't ideal. Credit cards come with high interest rates: If you can't pay back what you've spent on your emergency by the time the bill comes due, your debt will keep growing.

But if you have no other option, here are some tips on lessening the pain when using credit cards to handle life's emergencies. (See also: Where to Find Emergency Funds When You Don't Have an Emergency Fund)

Pay back that emergency spending ASAP

Using a credit card for financial emergencies isn't necessarily a bad thing. Not paying your credit card balance in full each month, however, can really cost you. And you're more likely to not pay that balance off if you've just charged $1,000 or more to handle an unexpected financial crisis.

Blame this on interest. Credit cards come with sky-high interest rates. The average interest rate on credit cards stood at 16.7 percent as of September, according to Bankrate. This means that if you don't pay your balance off in full each month, your credit card debt can grow quickly, especially if that balance is high.

Don't think paying your minimum required monthly payment solves the problem, either. If you have $4,000 in credit card debt at an interest rate of 17 percent, it will take you 144 months to pay it off if you only pay the minimum each month. You will pay more than $3,000 in interest during this time. And that's only if you don't add any more money to your card's balance during this period.

It's so important to do whatever you can to pay off your credit card debt — including debt generated because of financial emergencies — as quickly as you can.

Use the card with the lowest interest rates

If you must charge an emergency on a credit card, use the card with the lowest interest rate. This is especially important when you are charging a large amount that you know you won't be able to pay off in one payment. The math here is simple: The higher your card's interest rate, the faster your unpaid balance will grow. Always use your lowest-rate card for big emergencies.

Create a repayment plan

If you can't repay your emergency charge in one month, you need to come up with a game plan. Determine how much money you can spare each month to cut down on your credit card debt, and apply those extra dollars to it.

Your goal is to pay off your credit card debt as quickly as possible. Maybe you send an extra $100 each month to your mortgage payment. If you have outstanding credit card debt, shift that $100 to your credit card bill instead. Mortgage debt comes with far lower interest rates than debt associated with credit cards. You should always pay off your debt with the highest interest first; it is costing you more, after all. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

If you have to cut down on other unnecessary expenses — everything from eating out to going to the movies or taking a weekend road trip — do it until you eliminate that credit card debt.

Consider a Balance Transfer

If you've created your repayment plan and feel you can realistically adhere to it, you might be able to pay off the debt even faster and save some money by doing a balance transfer. If your credit is good, you can get approved for a card that offers a 0% Intro APR on balance transfers for up to 21 months. That gives you a good chunk of time to pay off your emergency expenses without paying interest. However, keep in mind that you'd need a card from a different bank than the one you're trying to transfer a balance from, and interest rates on these cards are typically very high, which means that if you don't pay off that balance during the intro period, you'll get stuck with a high interest rate debt and make you worse off than before. Finally, there is usually a balance transfer fee, though there are some cards that offer $0 balance transfer fees.

Build an emergency fund

It's time to build an emergency fund that you can tap to cover unexpected expenses. If you have an emergency fund ready to go, you won't have to worry about putting these expenses on your credit cards again in the future.

Building an emergency fund isn't complicated, it just takes discipline. Start small if you must: Put $100 a month into a savings account. If you can put in more, do it. Your goal is to build an emergency fund that can cover six to 12 months' worth of daily living expenses. That way, you'll be covered if your water heater bursts or your refrigerator conks out. (See also: 6 Fast Ways to Restock an Emergency Fund After an Emergency)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Contingency Plans

Philip Brewer — Fri, 12 Feb 2010 14:00:03 +0000

Are you assuming that things will go along pretty much okay? Most people do, and they're usually right. Even when they're wrong, it tends to be okay, because the typical household's finances can absorb the occasional small blow. But sometimes the blows are medium-sized or large. What do you do then?

I've written before about handling the large financial blows. (In particular, I've written about losing a job and about moving your household finances to an emergency footing.) Dealing with the medium-sized blows is easier, but at least as important. After all, they're more common.

Sometimes the blow falls on the income side: Wages or salary cut, hours cut, an expected raise or bonus deferred or canceled, falling interest rates or dividends (a big deal for those living on capital). Other times on the spending side: Unexpected expenses, rising prices. So, how do you handle problems of this sort?

Well, the short answer is that you handle them in the obvious way. In the very short term you dip into your emergency fund, cut back on savings (or cut back to the minimum on repaying debt), or even borrow money. Then, in the medium term, you hustle to boost your income and take steps to cut your spending until things are back in balance (and you can replenish your emergency fund and resume normal saving or accelerated debt payments).

The longer answer, though, is that it's worth having a plan — because taking one of these medium-sized blows to your home economy can prompt you to make unwise decisions when you try to play it by ear.

We just had a good post on making an emergency plan for how to hold your emergency fund, how to access it in the case of an emergency, and what steps to take if the emergency outstrips your funds. The distinction here is that not all contingencies are emergencies. In fact, the whole point of a contingency plan is to keep contingencies from becoming emergencies. That's why it's worth going to the trouble of making a plan now, rather than waiting until it's an emergency.

Make your plan

Everybody's budget is a compromise between the cheapest way you could meet your actual needs and the most luxurious way you could satisfy your slightest whim. But there are many, many decisions embedded in that compromise. A contingency plan makes those decisions explicit, so that you know which dollars are going to the least important wants. Then you know where to cut when you get hit with falling incomes or rising costs.

As a bonus, actually making a plan informs your long-term commitments. Imagine that before you took out a car loan or signed a lease, you rejigged your contingency plan to allow for the new fixed expense. Seeing exactly which expenses might have to be cut if your finances took a hit might make you reconsider.

Strategies for implementation

Things change, so you don't want to just blindly follow a contingency plan that you made months or years ago.

Especially in the case where rising costs for specific categories are the problem, one thing to do early is to look at cutting those very costs. If the problem is rising food prices, take a fresh look at what you're buying at the grocery store — it's rare for all prices to go up the same. If the problem is rising fuel prices, take a fresh look at thermostat settings, at combining trips, carpooling, mass transit, etc.

Of course, at some level you ought to be doing this all the time. But once you've done it once (taken a serious look at where your spending is going and compared it to where you get the most satisfaction), the payoff to doing it again is going to be smaller. But when things are changing — especially when things you buy are rising in price faster than things you don't buy — it's worth doing again.

Probably the most common element of a contingency plan is simply deferring expenses. In many cases you can (temporarily) make do with what you've got, freeing up the portion of your budget that would have handled upgrades to cover contingencies.

Thinking about these things in advance makes it a lot easier to adjust smoothly to the little financial glitches that we all face.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Emergency belt-tightening

Philip Brewer — Fri, 07 Nov 2008 23:33:47 +0000

Typical personal finance advice would have you divide your budget categories into two groups: Your fixed expenses and your discretionary expenses. I generally don't like that distinction much--how is your power bill more fixed than your grocery bill? When you reach the point of emergency economizing, though, it's a useful way to structure your thinking.

Fixed expenses can be reduced, but those reductions often require long lead times (waiting for a lease to run out, so you can move to a cheaper place) or they require an upfront investment (buying a more energy-efficient refrigerator). Even when you can cut them, it's generally not practical to reduce them to zero, (except for those few people living off-the-grid).

So, in a financial emergency, the first place to look is at your discretionary expenses.

Start with zero

If you've got a budget, go through the non-fixed expenses and plug in zero for every number. Then, go back and adjust up the ones that are really essential. (Starting from zero and just budgeting what your household needs is, by the way, always a good idea.)

You've got to have food. In an emergency, though, you can cut your food bill by a lot more than you probably think. (And, as a bonus, cheap eating is probably healthier than what you were eating before, even if it may have to be less organic and less local.)

You've got to stay healthy. If you've got medical insurance, keep it in effect if you possibly can. If you're being treated for a medical condition, call your doctor's office and inquire if the treatment you're getting is the lowest-cost treatment that's available. (The phone conversation--typically with a nurse or physician's assistant--will probably be free.) In a financial emergency, it probably makes sense to delay even things that are important, if they're not urgent--eye and dental exams, routine check-ups, etc.

If you've still got a job, you probably need transportation. In an emergency, though, you should zero out any transportation expense that isn't earning you money. Every trip should be either to work or from work, with stops for errands along the way and not trips of their own. Reducing the number of cars your household supports can save a huge amount of money--each car costs thousands of dollars a year in fuel, insurance, and financing expenses. Consider things like carpooling, public transport, walking, bicycling, and so on.

Education is tricky. If you're not in school, zeroing out your education budget doesn't save you much money. If you are in some sort of degree program, disrupting it might reduce your future earnings by vastly more than you're saving--and yet, that might be the right choice in an emergency. On the other hand, if financial aid is paying most of your education expenses, or if your health insurance depends on your being a full-time student, your education expense may be too good a bargain to pass up if you can possibly afford it.

Debt payments generally can't be escaped, except by filing bankruptcy, which is obviously a last resort. There may be a few exceptions--student loans can be deferred under certain circumstances, there are moves afoot to develop programs for restructuring mortgages. For debts that are tied to some specific thing (such as a car), consider selling the thing and putting the money toward the loan. Doing that will generally leave you out of pocket, but getting the monthly payment off your back can still leave you ahead--the sort of hard choice you sometimes have to make in an emergency.

That's about it. Every other discretionary expense should go to zero: recreation, eating out, vacation, travel, clothes, shoes, etc.

Defer what you can't avoid

Many expenses that can't be avoided can be deferred in an emergency. Generally, don't replace (or pay to repair) things that break or wear out. For example, instead of getting a broken dryer fixed, dry your clothes on a drying rack until the emergency is over. (As a bonus, the clothes will last longer.) You probably can't get away without fixing your furnace or hot water heater, but you can get by without lots of things that you're used to using every day--microwave, toaster, TV, stereo, iPod, etc. Make them last as long as you can, but when they go, do without until the emergency is over.

Sometimes proper maintenance will save a lot of money in the long run if done promptly--replacing a roof before there's water damage--but in an emergency, it's often necessary to accept that you won't be able to make the choice that's cheapest in the long run, because you're short of cash in the short run. That's the nature of emergencies--you do what has to be done, and then do what you can to mitigate the harm after the emergency is over.

Ask for necessities

If you have relatives who give you gifts, ask that they give you necessities instead of luxuries. Nobody wants to get socks and underwear for Christmas--except people with holes in their socks and worn-out elastic in their underwear.

Use your time

If your financial emergency is due to the loss of a job, you've now got time that you didn't used to have. Some of it--most of it--should probably go toward finding a new job. But there's still time that can be used in place of spending money. Cook cheap meals from scratch (much cheaper than prepared meals). Do stuff around the house that you might otherwise have hired someone else to do. See if you can't do stuff for neighbors--helping in their garden, showing them how to create a website, and tutoring their kids can keep you on a more even footing when they're sharing produce from their garden, giving you rides into town, and letting you use their tools. Make things (sweaters & scarves, jellies & jams, beer & wine, cakes & pies) that you can give as gifts or barter for stuff you need but can't make.

Look ahead

Don't dismiss the fixed expenses entirely. For one thing, even small measures like adjusting your thermostat and turning off lights you're not using will definitely save dollars, even though they won't reduce your utility bills to zero. For another, even "fixed" expenses are only fixed in the short term. Depending on how long your emergency lasts, some (or even many) of your fixed expenses will become unfixed. Know when your lease is up, when your cell phone contract is up, when the term ends for your kid's private school. Look especially at annual fees that will get charged automatically if you don't cancel something. Figure out now when you'll have to put the wheels in motion in order to switch to a lower-cost option at the next opportunity.

If you're not in debt, it's pretty amazing how low you can push your expenses on an emergency basis, simply by zeroing out all your discretionary spending and deferring other spending (including essential spending) until the emergency ends. As in so many other areas of life, it's really debt that's the killer. In fact, I'd go so far as to suggest that, in the current economic situation, having any significant debt means that you're already in a financial emergency--even if you've got a good job and a solid emergency fund. I recommend some preemptive belt-tightening and getting that debt paid off.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3-6 months of living expenses?

Julie Rains — Thu, 05 Jul 2007 19:08:38 +0000

Personal-finance experts often recommend having 3-6 months' worth of living expenses saved and easily accessible. In his July 1, 2007 Getting Going column ("Popular Advice You Shouldn't Take"), Wall Street Journal columnist Jonathan Clements offers alternatives to a cash account (e.g., savings account or CD). He's got practical ideas that relate to how people really think, live, save, and invest.

Let's consider why experts make this recommendation so you can develop a personal-finance Plan B.

The primary reasons experts recommend cash reserves are 1) to pay for emergencies or unexpected, non-budgeted expenses such as medical bills or major home repairs 2) to pay regular expenses (e.g., your rent or mortgage, food) if you become unemployed, disabled, or lose income for some reason. They want you to avoid financial unpleasantness that may haunt you for years to come:

Bad: you have to pay for emergencies using credit cards with high interest rates; you have to sell your mutual funds, ETFs, or stocks, during a market downturn.

Worse: You have to pay tax penalties for withdrawing funds from your 401(k) or tax-deferred account.

Catastrophic: you have to declare bankruptcy; you lose your house to foreclosure.

Try to prevent or calmly, wisely deal with financial emergencies:

Don’t go a day without health insurance, especially now that the insured get discounts not typically available to the uninsured;

Get an estimate of costs ahead of medical bills and start setting aside money before the bills are due (In my experience, healthcare providers are slower than other vendors in forwarding bills as they often wait for insurance reimbursement before requesting payments from consumers);

Ask for a payment plan from vendors (When I was in my early 20’s, my dentist offered to let me pay a small portion monthly until my balance for extensive dental work was paid in full; my childhood dentist didn't believe in novacaine so I avoided dentists while in college);

Buy disability insurance;

Have your home inspected or do a home inspection yourself, figure out what items need to be replaced or fixed before they completely disintegrate, and start planning for major home repairs now;

See if your homeowner’s or renter’s insurance can cover unusual expenses.

Note that there are scenarios where losing your job wouldn’t be financially catastrophic:

You have a spouse/significant other who can cover regular expenses (which means, most likely, that you have purchased much less house or less car than you can afford by lenders’ standards or you have a high-earning spouse/significant other);

You can adjust your living situation easily (e.g., move in with your parents while looking for another job or recovering from an injury);

You work in a field and/or live in a market that makes finding a new job with pay comparable to your current one relatively easy (but if your company compensates you extremely well compared to its competitors, start socking away money now!)

In Popular Advice You Shouldn't Take, Mr. Clements suggests these alternatives to saving cash:

fund your 401(k) to receive company matches and tax benefits;

save some money in a conservative, taxable account;

open, fund, and, if necessary, access contributions to a Roth account (your contributions can be taken out without tax consequences although earnings generated from the investments can not be used without penalty; see this article on the Roth)

make a down payment on a home using funds you've saved by not having traditional cash reserves, and then

take out a HELOC (home equity line of credit), which should carry a lower interest rate than a credit card.

Please know that Mr. Clements and I do want you to set aside money now for future use; we just want you to consider investing your money rather than putting funds in accounts with low returns. When you can enjoy the fruits of not spending (buying a home, getting company-match dollars, growing your portfolio), you'll be motivated to keep on saving and investing.

(edited for placement of link to Mr. Clements' article)

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: