Use Your Credit Card as an Emergency Fund?

A few months back when I wrote about how our small emergency fund saved us, No Debt Guy commented on how having an emergency fund in cash may be counterproductive. Here is what he said:

I have often wondered if having an emergency fund is the best way to pay off debt or is it counter productive?

For example if you are carrying at credit card balance of $2,500 and have $2,500 in your emergency fund you would be better off paying off your credit card and rebuilding your emergency fund.

What if you have an emergency? You can still take a cash advance from your credit card and you are no further ahead.

This does take some serious discipline, but you will save interest costs.

He does make some interesting points. However, I feel that one needs to be SUPER cautious with that type of system.

Most of you are probably in some type of debt. It’s why you’re here. You’ve probably overspent with credit cards and bought things that you didn’t need. I know I have. So, shouldn’t your main goal to be rid of credit cards forever? Like Dave Ramsey often says, “no one EVER told me they got rich by using credit cards”. I have to agree with that point. When I was using my credit card that gave me cash back, all I could think about was hitting that $50 mark so they could send me a check. So, I would spend more money to earn 1%-3% back. Talk about counterproductive! There was no way I was going to get rich by playing that stupid game.

So, I figured I would come up with a few reasons why it may be counterproductive to use a credit card (or any other line of credit) as an emergency fund. Here are some things to consider:

You May Redefine What an Emergency Is

It’s been said before that using a credit card makes you susceptible to spending more. So, wouldn’t using your credit card for an emergency be the same thing? If you car breaks down and you only have $1,000 to fix the problem, wouldn’t you shop around? I know I would. However, if I were using a credit card I would be more likely to just give in to the initial price and pay it. It’s only on a credit card, right?

I think you may also redefine what an emergency fund is. For example, would you typically use your cash emergency fund to pick up a small amount of groceries if you are out of grocery money for the month? Probably not. But if you have that credit card to fall back on, you might just head to the store when you may have some things to eat at home. If you are like me, you would probably pick up more items too!

You’ll Miss the Experience of Paying With Cash

Most people say that it’s harder parting with cash than it is using a credit card. I’m a little more skeptical but I still think it’s true. However, I think having a cash emergency fund makes you learn to handle money better. I mean, you got into credit card debt by using credit cards. How is still using a credit card in emergencies going to make you any better at handling money?

* * *

Personally, I love having a cash reserve. It just makes me sleep better at night knowing that I can actually hand someone cash if I have a financial emergency. Handing them a piece of plastic would be much harder to handle knowing what I’ve been through financially.

How about you? Cash or credit?

15 thoughts on “Use Your Credit Card as an Emergency Fund?

  1. Denise

    To us it’s a mindset. If we tell ourselves that credit cards are NOT an option we get creative and find a different way to pay for that car repair, unexpected bills, etc. For example, last Christmas we were about $400 short of money to buy Christmas gifts (and we have a Christmas club – just didn’t stretch quite far enough). In years past we would have just used our credit card to fill the gap, but this year we told ourselves it wasn’t an option. So we sold a few things on ebay, worked a few extra hours at work, and made a few homemade gifts instead of purchasing expensive gifts. It felt wonderful knowing that we were not relying on credit and that instead of ADDING to our debt we continued to pay down on our Debt Snowball even during the holidays! Once you take credit out of the equation it’s liberating.

    1. Adam Post author

      Awesome way of looking at it Denise. I feel the same exact way. I just think I would settle on a price if I was using a credit card vs. finding a better deal.

      Great job on the Christmas gifts too! Felt great didn’t it?

  2. Budgeting in the Fun Stuff

    We use credit cards for the cash back BUT I’M A CRAZY LIST MAKER. This won’t work if you don’t have complete control of your budget anyway.

    That said, our emergency fund money is with Smarty Pig and ING Direct. I think an emergency fund needs to be in cash. If we had high interest debt, I’d limit our emergency fund and funnel the rest to the debt, but I’d still keep at least $1000 around. Who wants to fund a $400 set of new tires at 18%-25%?

    So I guess we’re split…we use the credit card for daily purchases that we already have money for, but our emergency fund is in cash.

    1. Adam Post author

      I hope to be that disciplined one day.

      That’s a good point on the high interest debt. If you have a large emergency fund with high interest debt, it’s beneficial to pay off the debt and keep a slightly smaller emergency fund. You still need some sort of cash emergency fund though.

  3. Caro

    The other big factor is that credit card companies can take away your credit at any time. For any reason.

    It’s not very likely for many of us, but for others with only one or two cards, it’s a big risk.

    The other factor is that an emergency fund is a really good cash reserve to have when applying for a mortgage. Sure, you can save up and have enough to put down the required %, but these days banks are really interested in seeing your emergency fund. (This can be in CDs, so it doesn’t have to be strictly cash.) If you get into the habit of having one at all times, you’ll be preparing for a bigger purchase like a home.

    But on the other hand, it is absolutely painful for me to have debt outstanding these days. Even if it is the smart thing to do. So I understand the impulse.

    1. Adam Post author

      Great point Caro. You would be really hurting with no cash AND no credit! The only option after that would be a loan from family and believe me, it’s not worth it!

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  5. Sherry

    I concur with all the comments esp. w/ Denise i.e. the “mindset” or attitude towards credit cards.

    We are debtfree (except mortgage) & have sufficient funds for an emergency.

    Like, “Budget for the Funstuff”, we use credit cards for certain purchases, including emergencies & then IMMEDIATELY payoff the card. (the blessing of online access to accounts & online billpay!)

    I/we do this for 2 reasons:
    1. I love the points towards hotel rooms from my Marriott Visa.

    2. Often, AMEX extends the warranty on items purchased and sometimes a return is easier if on a credit card vs. a cash refund (or a store imposed store credit).

    I do not agree with using a credit card for an “emergency fund”…I think that is just a way of fooling yourself into thinking you are being fiscally responsible when you are not disciplined to save. That being said, in the past, when a debt has been reduced to $2500 or less, it was easier for me to pay it off with the savings then continue to make payments. Just getting that beast my back was worth it to reduce my savings.

    When it comes to choices i.e. paying off debt or keeping $$ in savings, I think you have to decide what “keeps you up at night more?”….the debt or a reduction in your cash savings….

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  7. Diane

    Cash all the way. I have credit cards, but I never use them unless I can pay them off in full by the due date. Now, since I am self-employed, I have a pretty big e-fund. Could I make more money in arbitrage by putting that $ in an investment of some kind that pays more than my savings account, and relying on CC’s for an emergency? Maybe. But that would mean a) voluntarily acquiring debt, a habit I avoid at all costs b) being at the mercy of CC’s to lower my limit, raise my rate, etc. c) fostering a habit in which I am reliant on others in case of an emergency and not myself.

    None of those options make me sleep better at night.

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  11. Anthony

    Most of the comments have already stated this: Cash is king for your emergency fund. The biggest reason for this is that when it’s cash, the money is yours. You use a credit card, and you’re instantly in debt again. Not a good thing when you’re trying to pay off debt.

    Additionally, credit card laws are changing constantly, and creditors are closing accounts left and right. If you rely on a credit card as your primary/sole emergency fund, you may find that your account is closed or your limit is lowered.

    In the end anyways, (these numbers are my example), we’re talking about $30k in an e-fund. My credit card limits don’t even go that high! Relying on my credit cards alone won’t cover 3 month’s expenses.

    On the other hand, I have no issues with using a credit card as part of my emergency “plan.” I’m set up in such a way that only $2k is instantly available. The rest of my e-fund is slightly less fluid (for monthly bills and the like)… or are in CD’s (for income replacement scenarios). In my case, my CC is my go-to, while I know that my “true” e-fund will pay off the CC ASAP.

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