Financial planners recommend building an emergency fund that can pay for major repairs and also cover necessary bills, such as rent, should you become unemployed or suffer an emergency. A good rule of thumb is to have an emergency fund that covers living expenses for at least six months.
Unfortunately, some folks lack such a fund and instead rely on credit lines. Even if you have the credit lines to pay for six months, relying on them as an emergency fund tempts fate.
For one, credit is not money in hand, and your creditors could reduce how much they’re willing to lend. Soon, that $10,000 credit line might be reduced to, say, $5,000.
Even if you can access the cash, however, you’ll have to pay a lot in interest. Credit cards and personal loans, among other types of credit, typically charge high interest rates. The average credit card interest rate right now tops 16 percent. And if you’re seen as high risk, rates can quickly surge.
It’s also worth noting that not all businesses accept credit cards, and even if they do, you may have to reach certain spending thresholds. If you try popping into a gas station to pick up a quart of oil, they may reject a credit card payment.
On top of all that, spending on credit now may cause more financial headaches later. If you’re out of a job and living on credit, you’d better find employment quickly. Otherwise, when creditors come knocking, you may find yourself in dire financial straits, perhaps joining the more than half-million people who declare bankruptcy each year.