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It’s a commonly accepted rule of personal finance that one should save 3 to 6 month’s worth of expenses in an emergency fund. Reserved for true emergencies, the conventional wisdom dictates that you stash your cash in a high rate savings account or maybe a short-term high yield CD. The key is to have ready access to the cash in a true emergency.

Confession time. I’ve never kept 3 to 6 months worth of cash sitting in a bank account and don’t plan to. In an emergency, I can tap investment accounts, a home equity line of credit, or yes, even the dreaded credit card. The question for today is whether it’s a smart money move to rely on credit cards as your financial backstop.

As reported by Frank over at Bad Money Advice a few months ago, Suze Orman recommends the exact opposite:

If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed.

I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.

Her rationale, which you can read for yourself, is that the credit card companies may reduce your credit, raise your interest rates, or even close your account. True enough. I know one person who had their credit limit reduced dollar-for-dollar as they paid down the balance. And we hear about this a lot in the news because reporters find the folks (few as they may be) who have been unfortunate enough to find themselves in these circumstances. (Reporters don’t track down the folks who have had no change to their credit cards, but if a reporter is out there looking for such a person, feel free to contact me.) Whatever the numbers, there is always a risk that credit you have today could be gone tomorrow.

On the flip side of this issue we find Liz Pulliam Weston. In an article entitled, The 0-dollar emergency fund, Liz argues that for some a credit card or line of credit is a perfectly viable emergency fund. Why hold money in a savings account paying 1% or 2% while your credit card debt is costing you 10%, 15%, or even 20% interest?

So what are the advantages and disadvantages of using a credit card for an emergency fund? We’ve touched on both above, but let’s list them out here:

Disadvantages of a Credit Card Emergency Fund

  • Availability of Credit: As noted above, there is no guarantee that the credit you have available today will be there for you tomorrow. Lose a job and fall behind on some payments, and the credit card company could close your account. I suspect that each individual has a pretty good idea of how real this risk is, and knowing your credit score can help better evaluate this risk.
  • Cost of Credit: Credit card debt rolled over from month to month can become very expensive. There are ways to mitigate this risk, including using low interest cards, but it’s still a risk to consider.
  • Lack of Discipline: If you are unable to control your use of credit cards, relying on a card for emergencies may be a recipe for disaster. Either learn to control your spending habits or get rid of the credit cards.

Advantages of a Credit Card Emergency Fund

  • Puts Cash to Best Use: The absolute most significant advantage to relying on a credit card for emergencies is the ability to put your available cash to its highest and best use. Rather than putting cash in a savings account paying 1% interest, you can apply the cash to high interest credit card debit, a car loan, or perhaps line of credit.

While I only list one advantage to using a card in emergencies, it’s a significant advantage. In fact, it is similar to the approach recommended by Dave Ramsey. He hates credit cards, of course, but he recommends saving just $1,000 as an emergency fund and then applying all available cash to non-mortgage debt. In a true emergency that exceeds $1,000, you’d be left relying on credit. And this is roughly the approach I take. The only non-mortgage debt we have is a home equity line of credit, and we put all available cash to pay it down.

Tips on Using a Credit Card for Emergencies

If you do decide to rely on a credit card as an emergency fund, here are some tips to consider.

  1. Make Sure to Pay Down Your Debt: Make sure that the money you would have saved for emergencies is used to actually lower your debt. Sometimes the extra cash can make us spend more. Your total debt should be going down every month.
  2. Consider Getting a Separate Card: If you already have credit cards with balances, it may be helpful to get a separate card just for emergencies. This is particularly important if your current card(s) is near its credit limit. With a separate card, you can file it away and use it only in true emergencies.
  3. Charge Card vs. Credit Card: A charge card, unlike a credit card, must be paid in full each month. The advantage is that it imposes discipline on your spending habits and money management skills. And because it must be paid off in full each month, there are no interest charges. The downside is that you may need to borrow the money for longer than a month. But for short-term emergencies, an American Express charge card may be ideal.
  4. Use a No Fee Credit Card: One disadvantage of a charge card is that they typically charge an annual fee. With a traditional credit card, you can get a no fee card.
  5. Avoid a Cash Advance: With a cash advance, you typically pay a percentage of the amount borrowed and a high interest rate with no grace period. It’s one thing to use a card to pay for an emergency car repair or hospital visit, but avoid a cash advance at all costs.

So what’s your take? Is relying on a credit card in case of an emergency a good or bad idea?

Author Bio

Total Articles: 1082
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Ken says:

I say CC as emergency fund a bad idea. Using a CC means you have to pay interest on top of the cost of the emergency. I say online savings account is best route.

Bob says:

This is STUPID advice. They are not accounting for risk. If you take a $1000 emergency fund and invest it like they say you could, and get 10% interest you’ll get about $100. If you lose your job and have to use your credit cards for a couple of months not only do you have no way of paying off the credit cards but you could rack up credit card interest payments of way more than $100 (that they say you could gain by investing). I thought this article was just joking, WOW it is really sad that they were serious!

DR says:

First, where are you going to invest the money where it’s both perfectly safe and earns 10%? Second, remember that the idea behind using the credit card as an emergency fund is so that you can pay down debt now that you have at a high interest rate.

Ikomrad says:

Always pay your credit card balances off in full each month. No one carries balances anymore, that ship has sailed. It just doesn’t make sense to give away money like that. Hopefully we can get society to restructure so that going into debt for a car or house also becomes a thing of the past.

Ginger says:

It seems to me that once a person has multiple income streams and a large amount of investments outside of their retirement they do not need as large of an emergency fund as most people. However for most people they do not have the will power, the multiple income streams and the investments to be able to have a small emergency fund. For example, I would use a credit card if I have a emergency, then I have a few more days to plan how I will pay the emergency, most of the time with my emergency fund, sometimes by cutting expenses, other times there are other choices I can make. However if you live on the edge already, you may not have those options and therefore using a credit card in emergencies is not a good idea.

Harsh says:

Agreed. Seems to me the best option.

I wouldn’t advocate using a credit card as an emergency fund. Surely this could work for someone who’s willing to take on more risk, but I’d feel extremely uncomfortable putting my emergency stash in a riskier investment than a high-yield savings account. I need to know that if I’ve set aside $20K in rainy day money, no less than $20K will be there when I need it. During a stock market downturn, you might be forced to lock in losses if you’re unable to replenish the funds quickly. In my opinion, the risk just isn’t worth it.

Additionally, cash has other benefits. What if a large asset or investment comes available at a bargain price when your portfolio value is down Cashing out a losing investment to pick up one at a discount, may not turn out to be much of a bargain at all. However, I’m not sure if you’re promoting zero cash reserves.

Bad idea. Cash makes a good emergency fund. (I say this as I look at the BIG citi add on the bottom of the page).

DR says:

Cash does make a good emergency fund, but does it make sense to save cash if you already have credit card debt? Rather than sticking that cash in the bank to earn little interest, why not put it towards the credit card debt?

ablenko says:

how can i get free credit card easily

DR says:

ablenko, most credit cards today are free in that they don’t charge an annual fee. Of course, if you carry a balance from month to month, you’ll pay interest charges. You can check out a lot of the popular cards on our credit card page.

It is very rarely a good idea to use your credit card as an emergency fund. If you have other resources available to you like a home equity loan — it would be better to use that for emergencies.

M in Colorado says:

I think a credit card for an emergency fund is a bad idea. In 2008, I had one for that purpose and since I had not used it, the company closed my account (It was only opened for less than 6 months). I have great credit, great income and have never paid anything late. A friend I worked with told me that in 2008, when she got laid off from our company, she had all her credit cards close her accounts and tell her that she no longer had the yearly income to support her credit limit with them. She had been laid off for 3 months and had never missed a payment to anyone. My aunt had placed a large amount on a credit card for a home remodel project and had her company raise her minimum payment from $125 a month to $395 with no reasoning to it. There may be a lot of people out there that have never had issues like these with credit card companies, but myself and knowing a couple more? I trust myself and not them and am not willing to give them that power over me.

Kathy says:

For me this is my plan but I have enough money to pay off all my debt in 12 months, paying off my low interest Visa with $1,000 credit limit. Using the amount I allotted for debt and saving I am able to save 6 months of high credit card interest while have a safety net. Then fully funding my Emergency fund, but I do have extra in my budget for a short term fund that covers repairs and unexpected costs.