Believing that a credit card could substitute an emergency fund is a financial fallacy due to these reasons:
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High-Interest Rates: Owing money on a credit card often comes with high-interest rates. Thus, in an emergency, when you might be unable to pay back the full amount on time, you’re likely to accrue a significant amount of debt due to these high-interest rates.
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Negative Impact on Credit Score: Overutilization of your credit card, especially in emergencies, can significantly lower your credit score, affecting your financial future, including the possibility to get loans for important needs.
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Spiralling Debt: Unlike an emergency fund, which represents actual money you’ve saved, credit card debts can easily pile up creating long term financial issues.
It’s easy to understand why one would consider a credit card as an emergency fund. The ‘instant’ source of funds seems convenient in case of an unexpected expense. In today’s economic situation, where saving can be quite hard due to escalating costs and stagnant wages, credit cards can appear to be a quick solution. However, this outlook ignores the consequent financial stress that usually arises from indebtedness and the permanent nature of true financial stability.
An appropriate financial practice would be to establish an emergency fund, even if it’s small to start with. This means instead of spending money, you should save and invest money each month in a high yield savings account. Over a period of time, your money would grow more than what you can get from a regular savings account.
These resources can further elaborate on this financial fallacy:
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“Your Money or Your Life” by Vicki Robin and Joe Dominguez. Book Link This book discusses personal finance as a holistic subject, dealing with emergency funds and credit card use.
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“Why Credit Cards Aren’t an Ideal Emergency Fund, and How to Build One” on NerdWallet Article Link This article clarifies why depending on a credit card for emergencies is a bad idea.
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“Economic Well-Being of U.S. Households in 2022” by the Federal Reserve Board Publication. Report Link This report talks about the importance of emergency savings and the financial fallacy of relying too heavily on credit cards.