Ever had a really, really bad day? Your water heater blows up. You're in the basement cleaning up the mess, and you hear a huge crash -- a tree falls on your house. Running outside to look at the damage, you see a Mack truck backing over your car, squashing it like a soda can.
Wouldn't it be nice if the fates smiled on you, and you won the lottery on the same day? Well, that's about as likely as seeing Alan Greenspan in a sequined bikini. You're probably going to have to come up with some cash -- quick!
The price of fast cash
Let's assume these emergencies cost you $3,000, and it takes you a year to recover from your bad luck. If you head for a handout from My Favorite Credit Card, how much bail can you expect to pay to get out of trouble? Here are a few examples, gleaned from disclosures from several large credit card issuers. (Your costs may vary, even if you hold a card issued by one of these companies.)
Borrow from Capital One
Those hundreds in fees pay for little more than the privilege of getting your hands on a wad of cash when you want it. Could you get a better deal from someone who promises to break your kneecaps if you don't pay back the loan on time? Probably not. (Knee surgery isn't cheap these days.) But borrowing from your credit card can be really expensive.
Before an emergency hits and panic causes you to stick your credit card into an ATM machine, calculate how much that loan will cost:
Does your card charge a fee? Most do. All three companies used for these examples charge 3% of the amount of the cash advance. Some set a minimum charge of $5 or $10 but no maximum. That $3,000 could cost you $90 up front, even before interest starts running.
Do you get a grace period before interest accumulates on your cash advance? Taking advantage of a grace period can be a Foolish use of credit. Cash advances typically don't get the same treatment. So even if you just need the money for a couple of weeks and plan to pay it off when the next statement arrives, you'll pay something.
What's the interest rate? Don't assume it's the same as the rate applied to purchases. Interest rates for cash advances can be high. Look at your most recent statement for more information. For the examples above, I looked at the disclosures on the credit card websites. The rates ranged from 19.8% to 23.24%.
How long will it take you to pay back the loan? Be realistic when you calculate how many months you can expect to pay interest on the loan to get the best estimate of the cost of your cash advance.
What's a cheaper way to get cash? Set aside your own emergency savings, and you can get your hands on some money fast without paying fees, interest charges, or dealing with tough guys named Vinnie.
You can learn the basics of establishing an emergency account in 60 seconds. The payoff? Not only will you avoid paying too much for a loan, but you could even make a little money. Save your money in an account that pays a decent amount of interest, and you'll build a bigger safety net while your money sits waiting for an emergency.
You'll want easy access to your money, but don't make it too easy. Look at a money market deposit account or a certificate of deposit for some high interest rates available on savings. You might consider Treasury bills or bonds. You can compare the pros and cons of your savings options using this handy list in the Motley Fool Savings Center.
For more ideas to prevent emergencies from costing you a bundle, take a look at these Foolish articles:
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