Personal finance experts advise most people to have an emergency fund — enough money socked away in savings to cover three to six months' worth of living costs. An emergency fund can help you ride out a disruption to your income without going deep into debt by putting living expenses on credit cards or taking out loans.
It's important to acknowledge that some people simply can't save that much. Every penny of their income goes toward basic living expenses. If disaster strikes — such as a layoff, a big medical bill or an urgent car or home repair — they may have to lean on their credit cards to get through. You do what you have to do to survive.
But other people do have the ability to save money for an emergency but choose not to, reasoning that they can fall back on their credit cards. In doing so, they're willingly putting their financial future at risk. Here are six reasons why you shouldn't treat your credit cards as an emergency fund if you can afford to save.
1. It's borrowed money
Saving money for an emergency is an exercise in forethought: You have extra income today, so you set it aside for a time when you might not have any income at all. You're moving your own money around, and when you spend it, you don't have to pay yourself back (aside from rebuilding your savings when you can). Think of it as your "past self" taking care of your "present self."
By contrast, when you use credit cards as your emergency fund, the money you spend becomes credit card debt that you'll eventually have to repay. Your "present self" is borrowing money from your "future self." But, critically, you don't know whether that future self will have the extra income to handle the debt. If they don't, you may be sending them (meaning: yourself) a crushing debt load.
2. The interest rate is sky high
Using a credit card for emergency spending not only produces debt, but you'll pay for the privilege of having that debt. Most credit cards charge double-digit interest rates, making it even harder to pay down the balance.
3. Credit might not be accepted
In a world where using a credit card for a 50-cent pack of gum is common, it's easy to think cards are universally accepted. But plastic sometimes isn't welcome, and this could come at a very inconvenient (or scary) moment.
For example, if you're need an emergency repair on your home, the contractor might not take credit cards. Many work independently and don't want to incur the additional fees and risks that come with accepting payment via credit card, as opposed to cash.
4. You could cut yourself off from credit in the future
If you max out a credit card (or two) to cope with a catastrophe, you can expect your credit scores to drop substantially. That's because you've significantly increased your credit utilization ratio, which is the amount you owe as a percentage of your credit limit. As a result, the 30% of your FICO score determined by amounts owed will take a big hit. This is fixable, but could make getting credit difficult or very expensive in the future.
5. The issuer could cancel your card
If you're keeping an extra credit card on hand for emergencies but don't use it otherwise, you might be in for a nasty surprise at the worst time. Issuers commonly close credit card accounts that have been inactive for a certain length of time. Further, when an account is being closed due to user inactivity, the issuer doesn't have to give you any any advance notice. This means you could be stuck without a credit line when you need it most.
6. The credit will run out — then what?
If you're counting on your credit card to get you out of a jam, there's no telling how expensive that jam could get. Eventually, your line of credit will run out — at that point, you'll be out of options for resolving whatever crisis you're dealing with.
Of course, savings can run out, too. But having a robust emergency fund will buy you some time to explore other alternatives, such as taking out a personal loan or borrowing money from family. Obviously, these are last resorts, but at least they're options on the table. If you burn through your credit limit and fry your credit score in the process, you'll have a much tougher time finding additional help.