Thursday, October 14, 2010

Credit Card as Emergency Fund?

Most of the people I have talked to consider credit card as an emergency fund. They will always tell me, “At least if an emergency, like hospitalization occurs, we have something to present at the hospital.” And I always tell them, "Can’t you make it with your cash?” Then they will reply, “Well, you know what, we have no cash at the moment that is why we need credit cards.”

Emergency funds and credit cards are two different things. You cannot treat the two as synonymous and similar.

Emergency fund is a part of our financial foundation. This is like a solid wall you can lean on. Why? Because it will act like a cushion if an emergency situation occurs. Imagine you are a bird and then a hunter came, aimed towards you and “Bang!” Your right wing was shot. You don’t have an option but to go down. You panicked. You didn’t know what to do. You are not prepared for this. You were going down so fast that you hit the ground head first. Then you died. What if this happens to your finances? You are a happy go lucky man. You live your life each day like there is no tomorrow. You shop too much, play so hard and eat like a king. Because of your lifestyle you got sick. You don’t have an emergency fund and nothing to present to the hospital.

Let’s go back to the story and pretend that you have a credit card as your emergency fund. If you get sick you charge the fees to the card. Yes you will be treated. Yes you can go out of the hospital. But because you don’t have spare cash you are forced to pay every payday depending on the amount. What if your 15-day salary can’t cover for the expenses? What if your 1 month salary can’t cover for it? Worst, what if your 2 month salary can’t? That will be the time your hospital debt will incur charges and fees. Instead of paying for the principal alone you are forced to pay for the interests and charges.

Imagine you saved three to six times of your monthly income and put it in a bank? You got sick and was charged 4 times of your monthly salary. Will you not be able to pay for it right away? Will you be happy to go out of the hospital, treated and free of debt?

Emergency funds are not just for hospital bills. They are for emergency situations. Like a sudden flood, house repair and most of all job loss. Can your credit card cover for your needs when you lose your job? For a month maybe but not for three months.

~till then

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