Havingsavings for a rainy day can be a great lifeline if you find yourself struck bya financial emergency. Just one unforeseen event, like a broken down car orlosing a job, could see you facing a period of financial instability. However,studies show that 27% of Brits have no emergency funds—a considerable oversight which falls above theEuropean average figure.
One ofthe most frequently-used safety nets for cash-strapped people is a credit card,and over 59 million were issued in the UK in 2018 alone. Having an emergency credit cardcan be the perfect way to navigate financial struggles. By using it only whenabsolutely necessary, you give yourself a contingency plan should an emergencystrike. But is it really a sensible way to secure funds, and is it worthapplying for an emergency credit card yourself?
What advantages doemergencies credit cards offer?
Providedyou pay back your balance, emergency credit cards can effectively act as aquick, interest-free loan. In fact, they can be even better than debit cards orcash payments, as they enable you to pay for purchases at a later date, orspread the cost over several monthly payments. Having these options can beparticularly useful in an emergency situation.
Becausecredit cards are typically quick and easy to obtain—provided you have a goodcredit score—they offer an effective way of securing a financial lifeline in anemergency. Unlike taking on part-time work or selling possessions, emergencycredit cards give you instant access to the money you need to keep yourselfafloat financially.
What are the drawbacksof emergency credit cards?
Themain downside of an emergency credit card is the same as any other source ofcredit—the risk of debt. Failure to pay back what you borrow can lead to heftyinterest charges, with some banks charging rates over 20%. Defaulting onpayments is all too commonplace, with the current credit card default ratecurrently sitting at 22.9%, the highest rate since early 2017. Meanwhile, the average UK household has £2,688 unpaid on credit cards. Letting your credit card debt snowball canalso harm your wider credit score.
Thereare several other charges that can impact credit card owners. Many cards levyannual fees, and it can cost several hundred pounds just to own one in thefirst place. Some banks will also make you pay for spending over your limit,using your card overseas, or transferring your debt to another account. Allthis can add up, and plunge you further into debt.
What’smore, you may not even be able to rely on your emergency credit card in apersonal financial crisis. Your bank can change its terms at any time to reduceor cancel your borrowing limit entirely, and they could also increase yourinterest rate or hit you with additional fees for simply owning a card. Inthese scenarios, an emergency credit card may become a lot less helpful thanyou envisioned it would be.
What are thealternatives to an emergency credit card?
Whileemergency credit cards are clearly useful for securing funds in a hurry, theydon’t come without risks. As such, you may want to consider alternative meansof borrowing money.
Apersonal loan gives you near-instant access to funds by allowing you to borrowand pay back a set amount each month from either a bank or a dedicated lendingcompany. You can often borrow more than with a creditcard andthere is usually a fixed interest rate, while having a set repayment amountcould also make it easier to manage your monthly finances. However, althoughthey are fixed, interest rates on personal loans are often higher than otherforms of borrowing, and most banks won’t lend less than £1,000, or for shorterthan 12 months. This means you may borrow more than you need or can afford, andend up in debt as a result. It can also be difficult to obtain a personal loanwith a low credit score.
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What is a Safeguarding Account?
If a low credit score is an issue, you could opt for a guarantor loan instead, where somebody you know agrees to make the loan repayments if you don’t. The guarantor must usually have a good credit rating themselves and, as this is a serious financial responsibility, should be someone you know and trust. As Amigo Loans discuss in their video on the subject, this agreement won’t affect your guarantor as long as you make your monthly payments.
Paydayloans are often a go-to solution for many people with financial problems.Instead of receiving a set amount each month, you get a direct loan into your account which you repay with full interest and chargesat a set date, usually one month later. While payday loans will get you a largeamount quickly, their interest rates are notoriously high, and can worsen yourfinancial situation in the long run.
Whileemergency credit cards are a popular way to secure funds, they are fraught withrisks and may leave you in a more perilous situation than the one which led youto apply for a card to begin with. Of course, the same can be said for otherforms of borrowing too, so it’s important to consider each carefully, andchoose the option best suited to your situation.
