3 Reasons Why Credit Cards Don't Work as an Emergency Fund

Emergencies can happen at any time. That's why it's recommended to have an emergency fund, ideally with enough money to cover three to six months of living expenses. If you go through a job loss or any other costly life event, this gives you time to get back on your feet.

But that's a lot of money to save. Some people look for alternative options, and a popular choice is using credit cards as an emergency fund. While it may be tempting to do this and avoid saving so much, this is one of the biggest personal finance mistakes you can make.

1. You'll go into debt for emergency expenses

A key benefit of having an emergency fund is that you can pay for emergency expenses without going into debt. If your car needs a $2,000 repair, you just withdraw it from your savings account. It's still not fun to part with that money, but it doesn't become an ongoing issue or a new monthly payment you need to make.

When you put emergencies on your credit card, they stick around longer. You'll be paying them off over time and paying interest for each month you carry a balance on your card. If you put a $2,000 emergency on your credit card and you can only afford to pay $200 a month toward it, that's 10 months you'll be in debt.

It's even more dangerous if you have multiple financial emergencies, or one extended emergency. In situations like these, you'll need to go deeper and deeper into debt to keep paying your bills.

Let's say you lose your job and need to spend $3,000 a month on your credit card to cover your living expenses. It takes an average of about three months to find a new job, according to ZipRecruiter. If it takes you that long, you'd end up with $9,000 in debt.

2. Credit cards have high interest rates

Certain types of debt are more expensive than others. Credit card debt is some of the most expensive. Credit cards have an average interest rate of 21.47%, according to Federal Reserve data. That's extremely high, and it means using your credit cards for emergency expenses could cost you.

To show just how costly credit card interest can be, let's go back to that example of taking on $9,000 in debt after a job loss. If your card has a 21% APR, and you pay $300 per month, it will take you 43 months to pay off that balance. During that time, you'll pay $3,873 in interest.

It may be more convenient in the short term to not bother with an emergency fund. But it could be much more expensive in the long run when you need to get out of credit card debt.

3. Credit cards can't be used for certain types of expenses

You should be able to use your emergency fund for any type of bill. When your emergency fund is money in a bank account, you can. On the other hand, not all bills can be paid by credit card.

Mortgage lenders normally won't let you pay by credit card. It's not always possible to pay rent with a credit card, either -- it depends on your landlord. Considering housing is one of the most important bills to pay, not being able to do so in an emergency is a huge problem.

Now, there are workarounds. Plastiq is one of the most popular options. It allows you to pay just about any bill with a credit card, so it can help in a pinch. After you pay Plastiq, it mails a check to make your bill payment for you.

But Plastiq also charges a 2.9% fee for credit card payments. Checks can take up to eight business days to arrive, unless you pay more for expedited service. So it costs you more money, and it's somewhat inconvenient, since you need to schedule your payment over a week in advance.

Being financially prepared for emergencies

Credit cards can be useful, but they're not right for your emergency fund. If you don't have at least three months of emergency savings, make that a goal.

Figure out an amount you can afford to set aside every month, and transfer that to a savings account specifically for emergencies. An emergency fund is an important part of your financial security, and having one will give you the peace of mind that you're ready for anything.