Should You Pay Off Credit Card Debt With Your Emergency Fund?

Credit cards are useful, but they also make it easy to go into debt. If you've been spending more than usual lately, you may have found yourself in this situation. And if so, you're not alone. The average American's credit card debt is $6,501, according to credit card debt statistics gathered by The Motley Fool Motley Fool Money.

If you have a healthy emergency fund, you could use that to help pay off your credit cards. But should you? Here's what you need to know and a good alternative.

It's better than paying costly interest charges

Emergency funds are intended for unexpected bills. So if you went into credit card debt because of an emergency, then it would make sense to pay that with money from your emergency fund.

What if it wasn't an emergency? For example, you went on a vacation, spent more than you were expecting, and came back with $5,000 in debt. This clearly doesn't fit the definition of an emergency, but it could still be best to use your emergency savings to pay for it.

In this case, you can break the rules because it will save you more money overall. Credit cards have high interest rates -- the average on interest-bearing accounts is 22.77%. Even if you keep your emergency fund in a high-yield savings account, it won't be earning anywhere near that.

Let's say you have $5,000 in debt at a 22% APR. You can pay $400 per month toward it. Your options are:

• Pay the $400 per month toward your credit card debt. You'll pay it off in 14 months, and it will cost you $731 in interest.
• Take $5,000 from your savings to pay off your debt, and use the $400 per month to rebuild your emergency fund. You'll rebuild your emergency fund in 12.5 months, and you'll pay $0 in interest.

The risk is that you have an actual emergency after you've tapped into your emergency fund. But worst-case scenario, you could pay that with your credit card, and you'll be in the same position as before.

You may not want to use your entire emergency fund. It's always good to have some cash on hand, just in case you need it. You can't pay everything with a credit card. You'll need to decide how much money you're comfortable taking out of your savings.

Look for balance transfer offers first

The benefit of paying off credit card debt with your emergency fund is avoiding interest, but there's another way to do this. If you have good credit, meaning a credit score of 670 or higher, you might qualify for a balance transfer card.

Balance transfer credit cards have a 0% intro APR on balances that you transfer over. The intro APR period depends on the card. Some have a 0% intro APR for 15 months or longer.

If you have a credit card balance with a 22% APR, you could open a balance transfer card and transfer it over. There's a small balance transfer fee -- usually 3% or 5%. Once you've done a balance transfer, you'll have time to pay down your debt interest-free.

You could get the best of both worlds this way. You avoid interest charges without needing to tap into your emergency fund.

Don't make it a habit

Your emergency fund can work in a pinch for paying off credit card debt. With how high credit card rates are, there's no reason to pay interest if you can avoid it.

Keep in mind that this still isn't good for your finances. You'll have less emergency savings, which could be problematic if a true emergency arises. You're choosing the less expensive option, but it's better not to put yourself in this situation.

Reflect on what happened, why you ended up with credit card debt, and how you can avoid it in the future. If you spent more money than you realized, work on a spending plan so it doesn't happen again. If you're going into debt to pay your bills, you'll need to look for expenses you can cut and possibly also try to increase your income.

You can get yourself out of debt with your emergency fund this time, but you don't want to fall into a pattern of doing this. By figuring out how to avoid credit card debt going forward, you can keep yourself financially ready for real emergencies.