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How and when to use 'emergency' credit cards

Disasters do strike, and sometimes, plastic's your best option

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Despite all the expert advice about creating an emergency fund, yours is either nonexistent or has already been tapped. So what do you do when the car breaks down and you're short on cash? You call a tow truck and whip out that life-saving 3 1/8-by-2 1/8 inch piece of plastic and charge your way out of trouble. How and when to use 'emergency' credit cards

It's because common disasters can strike anyone at any time that experts say you should have at least one emergency credit card on hand -- even if you rely on a debit card or cash for everyday purchases such as groceries, gas and clothes. Just as important are the features of that emergency card, as you don't want one that will create another catastrophe.

"The fact is we live in a credit-dominated society, and there are times you will need to have a credit card in your back pocket," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. Cunningham strongly urges consumers to create an emergency fund (see "Alternatives to using an emergency credit card") so that when disasters do strike, you can tap those funds instead of a credit card. But sometimes what is or isn't in your emergency fund isn't enough.

If you're trying to decide whether you're really facing an emergency or not, here's some advice: "A true emergency is something affecting your basic life needs -- your health, shelter, food or getting home while traveling," says Clarky Davis, a financial counselor who runs TheDebtDiva.com.

Pick the right emergency credit card
Features to look for in an emergency card include a low interest rate -- you want to shell out as little as possible while you're paying off that new set of tires or root canal -- and no annual fee, experts say. As cards with no annual fee become more difficult to find, look for a low annual fee, Cunningham recommends. Also, look at other fees -- the late fee and over-limit fee -- and the grace period, recommends Gregory Meyer, community relations manager at Meriwest Credit Union in San Jose, Calif.

ALTERNATIVES TO USING
AN EMERGENCY CREDIT CARD

When disaster strikes, a credit card can seem like the only way out. If you don't want to resort to using plastic, follow these tips:

1. If you don't have an emergency fund, start one. Create a separate savings account and have a percentage -- Cunningham suggests 10 percent -- deposited from each paycheck. "At the end of a year, you'll have a little more than a month's income socked away, and that should see you through most emergencies," Cunningham says.

2. If you have an emergency fund, use it. "You don't like to see your emergency fund go down, but it's better than paying 24 percent a year in interest," says Danny Kofke, a teacher in Georgia who considered putting a minivan repair on his credit card, but instead used money he'd saved.

3. Consider asking a close family member for a loan. "Asking family for money is OK -- as long as you're not a serial asker," Cunningham says.

4. If possible, negotiate a payment plan with your service provider. It doesn't matter whether it's a doctor, dentist, auto mechanic or veterinarian -- ask. "A lot of times, this is something people will do, especially if they know you. Sometimes they won't even charge interest," Davis says.

5. If your emergency stems from a change in your financial situation caused by job loss or illness, look for help. "There are a lot of safety nets out there," Meyer says, citing food banks, career counseling, low-cost medical and dental clinics and even nonprofits that offer hardship grants.

Try to get a card with a high enough credit limit to cover the types of emergencies you're most likely to face -- for example, a homeowner who commutes to work might need a higher limit than a college student who lives on campus and walks to class, because house and car repairs are two common costly emergencies. "Just guesstimate how much you're going to need in an emergency. At minimum, you should probably have a limit of a couple thousand dollars," Meyer says.

If you have difficulties with debt or don't trust yourself with credit, Steve Rhode, who gives advice at GetOutofDebt.org, recommends getting a secured credit card, which requires you to make a deposit with the card issuer -- usually at least $200 to $300 -- that serves as your credit limit. If you don't pay your bill, the creditor can take the amount you owe from your deposit. "It creates an emergency fund, and in case of utter emergency, where you need to get cash, you could close that card and get your money back," Rhode says.

Keep your card in good standing
It's no longer a good idea to get an emergency credit card and stick it in a drawer until you need it. Now, you must use the card or risk having your account closed. "I would say once a month, maybe use it when you go pick up your dry cleaning. A moderate purchase -- about $50 a month -- should keep the card open," Cunningham says.

Don't let the need to use the card become an excuse to rack up a balance, though, experts warn. If you have trouble resisting temptation, take precautions. The old trick of freezing the card in a block of ice would make it difficult to make regular purchases, and some credit counselors suggest giving the card to a trustworthy family member, putting it in a safe deposit box or leaving it home sometimes. "It might not be good to carry the card with you if you're going shopping with your mom," says TheDebtDiva's Davis. "But if you're going to visit your sister in Pennsylvania, definitely carry it. Be strategic."

If you have only used the card for small purchases, then suddenly need it for an expensive emergency, contact your creditor, Davis recommends. "Otherwise, if they see unusual activity on the card, they might think it's been stolen and flag or freeze it."

Is it really an emergency?
When he was in college, Rhode got a credit card for "emergencies." "My first emergency was it was time for me to buy the beer and I didn't have the money," Rhode says, making a point: Before whipping out a credit card, stop and think, is this really an emergency?

NONFINANCIAL REASONS TO CARRY AN EMERGENCY CREDIT CARD

Putting finances aside, there are practical reasons to carry an emergency backup credit card. They include:

"You don't need a wallet full of credit cards, but I like to see people have two," says Gail Cunningham of the National Foundation for Credit Counseling.

Carrying a credit card helped military contractor Brian Albin, who was traveling for business when the transmission on his car failed. He got his car towed and paid for the $4,000 repair with his MasterCard -- then charged dinner and a hotel room that night. "I definitely think people should carry credit cards -- there are times when they can be a godsend," he says.

Most financial counselors hear stories about so-called emergencies -- Meyer knows a woman who considers a shoe sale an emergency and a family who insisted on booking a vacation even though a layoff was looming -- but there's gray area, too. For example, Meyer also knows a woman with $40,000 in credit card debt who charged a plane ticket, a rental car and two-week hotel stay to help a friend who had a baby. "It's all very subjective -- what's an emergency to you might not be an emergency to me," Meyer says.

If you do decide to use your credit card, charge only what you can pay off in a reasonable time period, and look at how much total interest you'll pay. "Don't charge more than you can pay in three months," Cunningham says. "If you have to, get a second job." Credit counselors say paying off the balance quickly also helps guard against the dreaded emergency snowball effect -- where multiple emergencies can get a consumer deep in debt.

Ideally, though, the time to think about how you'll pay for an emergency is before one happens. Rhode says: "When it comes to emergencies, there are two types of people -- those who have had one and those who will." 

See related: Emergency fund money critical in a crisis, Emergency fun, retirement come before credit card debt, Money and credit lessons from the past

Published: January 25, 2010


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