Do you use a credit card for emergencies? You are not alone, as many of us were taught to keep a credit card, “just in case.”
More than 189 million Americans have credit cards with the average credit card holder owning at least four cards.debt.org
Credit cards can come in handy when your roof leaks, you end up in the emergency room or something breaks down. And while we’d love life to be easy and breezy, an emergency is bound to happen at some point. But what’s worse than having an unexpected emergency, is paying more than necessary to cover that expense.
More often than not, credit cards make emergencies more expensive, and put you behind in preparing for your next unexpected expense.
Using a credit card does just that: the amount you charge will accrue interest, adding to the balance every month until you pay it off. At BrightDime, we love using real life examples.
Let’s say you hear a funny noise driving home from work one day. You take your car into the shop and the flux capacitor is broken. (We don’t know much about cars, so we made that up. Stay with us though.) You need your car to get to and from work every day, so you can’t avoid the $500 the shop is telling you it will cost to fix it. Good thing you have that credit card for emergencies like this, right?
In this example, f you don’t have any cash to pay the balance in full and pay the minimum on your $500 repair, it will cost you a total of $592, and two more years of stress for a $500 repair that could be a done deal on the same day.*
The best defense for handling unexpected expenses is a rainy day fund.
Setting aside a reasonable amount of cash will save you money and stress compared to using credit cards for those surprise expenses we all experience. At BrightDime, we suggest starting off with at least $500 saved in your rainy day fund, and working your way up from there.
* We’re using 17% APR [the average credit card interest rate] with a minimum payment of 3% of the balance or $25, whichever is greater.