Help a Reader: Emergency Credit Cards?
June 22, 2015
Today, I’m very pleased to answer a reader’s question about credit cards. Feeny asks:
My husband and I unfortunately ruined our credit (before we met) in our early 20’s. We are working on being debt free but as we all know it takes time.
We are expecting our first child in about 2 months. I keep getting told that we need a credit card in case of emergencies. Right now we don’t have anything.
My question is two fold: would you recommend a credit card “in case of emergencies” and if so, what is a low credit/no credit card you recommend?
I asked for some more detail about their debt repayment plan so that I could give a slightly more informed answer.
We are repaying what we can without living in poverty. Putting cash money in savings means more to me than paying back debts, although some days I can’t decide if that’s a good or bad thing!
Without numbers, I can only give some philosophical guidance but I think that’s still useful.
You do need something in case of emergencies and that something will vary depending on your circumstances and your habits. A credit card is an easy thing to recommend if you’re just looking at the situation superficially.
My reason: If you don’t have the cash on hand to pay for that emergency, then what exactly does a credit card change? It floats your emergency costs for about 20 days, give or take, after which the CC company then starts charging you interest up the wazoo. And there are plenty of people for whom that interest would take a relatively manageable surprise expense into a long term shackle around your ankle.
Now, if you have another backup plan for the emergency, like some saved cash that you just have to transfer back from an online only bank, or a family member who can bail you out temporarily while you get the cash together from your usual income because the emergency is just a bit bigger than for the cash you have in hand, then credit card? Sure!
Credit cards are a useful tool, I use them all the time to my benefit, but it only works if you know how to be responsible with them AND you have the means to be responsible with them. Knowing what you should do doesn’t help you when you don’t have the cash to pay the balance in full before they start charging you extra, right? Then you have Emergency Cost + Interest (which is calculated daily, just to further benefit the credit card company), which compounds every month.
What would I recommend, then?
I am actually in favor of putting cash away into savings even while you’re paying down debt, as long as you can keep the interest rates on your existing debt under control. No matter how slowly you build this cash savings, having it is a buffer against another unexpected expense putting you into a debt spiral. This was part one of my two-pronged approach to taking down the huge six-figure debt for my parents: putting a stop to more debt while paying down the existing debt. It’s not easy but it worked very well for me.
If you know that you can comfortably and responsibly put a credit card on ice, essentially only taking it out for actual emergencies that you can later cover with that savings, then yes, I would recommend doing that. It’s a tool, after all, and there’s no reason not to have multiple tools in your toolbox.
What cards would I recommend?
Specifics I look for: No annual fee. Good rewards. Moderate interest rate in case you have to carry a balance even temporarily. The interest rate will depend on your credit score, so I won’t list those here. They tend
For customer service, American Express is hands-down my favorite so I’ll share what I’ve carried for over a decade but you don’t necessarily want to use a travel-specific card unless you have to travel a lot anyway, in which case you may as well benefit. Chase and Citi have both been good over the years.
American Express Hilton Honors:
No Annual Fee
Complimentary Silver status, Rewards are Hilton Honors points
Citi Double Cash:
No Annual Fee
1% cash back at purchase and another 1% back when you pay the balance.
Citi Simplicity:
No Late Fees, No Penalty Rate and No Annual Fee
Current offer: 0% Intro APR on purchases and balance transfers for 21 months – sort of an argument to wait a little bit to get the card, I guess.
Chase Freedom:
No Annual Fee
1 Ultimate Rewards points per dollar spent
0% Intro APR for 15 months
Bonus:
These are the rewards programs I like for this stage of life (debt reduction) should you decide to use the credit card regularly and paying the balance in full every month.
Chase Ultimate Rewards: My favorite thing about this cash back program is that it’s true cash back. Redeem your points for a direct deposit into your bank account and defray whatever bills you have. Rinse and repeat. This was one of my little debt repayment strategies: Every dollar had to work twice for me: once in paying for whatever I bought, the second time in generating cash back.
Citi Thank You points: Not a favorite but I still like it. Redeem TY points for gift cards, either to use as gifts or to cut down on what you have to pay out of pocket for regular purchases.
I think it’s good to have credit card because sometimes you can’t *not* pay something regardless of whether you have the money. Examples: huge repair bills on the car (unless there’s great public transit), your roof dying, septic tank breaking, etc.
That said, there are ways to make sure you don’t use it for frivolous stuff (maybe one recurring charge a month): freeze it (in a ziploc bag submersed in water, put it behind something that you can’t easily move, etc.
Your suggestions are good. If he/she wants more card ideas, go to magnifymoney.com. It’s run by people who used to work for banks and credit cards. They rate them based on how opaque the terms are and you can filter by things like “low rate.”
Very good point – I lumped in all the possible surprise bills under the category of “not optional to pay” because I assumed that Feeny & Spouse would know which things were optional.
Thank you both for your suggestions!
I think at this point with our credit so low we would have a hard time getting any type of low interest credit card. In fact, although I haven’t applied for any in a while from what I’ve read I believe we may only be able to get a certified card? Where you pay a deposit on a card I guess?
Have either of you heard of those or have any thoughts on those?
For rebuilding credit, it wouldn’t be the worst idea. For actual emergencies… meh. I reviewed this article: http://www.bankrate.com/finance/credit-cards/10-questions-before-getting-a-secured-credit-card-1.aspx
Basically, you put in a certain amount of money and you can charge up to that amount. So… really no different from having money in the bank.
Right, as Abby says, you leave a deposit with them equal to your credit line so it’s basically like a bank account BUT the good thing about them is they report to the credit agencies so this lets you rebuild your credit! So in fact, you could get one and put some of your savings toward it, use it sparingly for regular bills you’d normally be able to pay off right away, of course pay in full every month, and start showing good actions on your credit history.