Having savings for a rainy day can be a great lifeline if you find yourself struck by a financial emergency. Just one unforeseen event, like a broken down car or losing 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 the European average figure.
One of the 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 card can be the perfect way to navigate financial struggles. By using it only when absolutely necessary, you give yourself a contingency plan should an emergency strike. But is it really a sensible way to secure funds, and is it worth applying for an emergency credit card yourself?
Provided you pay back your balance, emergency credit cards can effectively act as a quick, interest-free loan. In fact, they can be even better than debit cards or cash payments, as they enable you to pay for purchases at a later date, or spread the cost over several monthly payments. Having these options can be particularly useful in an emergency situation.
Because credit cards are typically quick and easy to obtain—provided you have a good credit score—they offer an effective way of securing a financial lifeline in an emergency. Unlike taking on part-time work or selling possessions, emergency credit cards give you instant access to the money you need to keep yourself afloat financially.
The main downside of an emergency credit card is the same as any other source of credit—the risk of debt. Failure to pay back what you borrow can lead to hefty interest charges, with some banks charging rates over 20%. Defaulting on payments is all too commonplace, with the current credit card default rate currently 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 can also harm your wider credit score.
There are several other charges that can impact credit card owners. Many cards levy annual fees, and it can cost several hundred pounds just to own one in the first place. Some banks will also make you pay for spending over your limit, using your card overseas, or transferring your debt to another account. All this can add up, and plunge you further into debt.
What’s more, you may not even be able to rely on your emergency credit card in a personal financial crisis. Your bank can change its terms at any time to reduce or cancel your borrowing limit entirely, and they could also increase your interest rate or hit you with additional fees for simply owning a card. In these scenarios, an emergency credit card may become a lot less helpful than you envisioned it would be.
While emergency credit cards are clearly useful for securing funds in a hurry, they don’t come without risks. As such, you may want to consider alternative means of borrowing money.
A personal loan gives you near-instant access to funds by allowing you to borrow and pay back a set amount each month from either a bank or a dedicated lending company. You can often borrow more than with a credit card and there is usually a fixed interest rate, while having a set repayment amount could also make it easier to manage your monthly finances. However, although they are fixed, interest rates on personal loans are often higher than other forms of borrowing, and most banks won’t lend less than £1,000, or for shorter than 12 months. This means you may borrow more than you need or can afford, and end up in debt as a result. It can also be difficult to obtain a personal loan with a low credit score.
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.
Payday loans 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 charges at a set date, usually one month later. While payday loans will get you a large amount quickly, their interest rates are notoriously high, and can worsen your financial situation in the long run.
While emergency credit cards are a popular way to secure funds, they are fraught with risks and may leave you in a more perilous situation than the one which led you to apply for a card to begin with. Of course, the same can be said for other forms of borrowing too, so it’s important to consider each carefully, and choose the option best suited to your situation.
