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How To Use a Credit Card To Help You Weather a Storm

The year 2020 has been a challenging one for sure.

We have all worried about our health and that of our loved ones as the coronavirus pandemic swept across the world. But there have been other troubles resulting from the pandemic, including financial ones. This year has brought job losses, reduced incomes and financially turbulent times for many people.

Sadly, the pandemic is not yet over. This means that we urgently need to consider how we can better secure our financial future. Contingency plans and emergency funds are on our minds. 

Many of us have vouched to improve our savings habits and be better prepared for stormy times. However, increasing the balance in our savings account takes time and dedication. What about the short term? What if that storm is just around the corner?

There are several reasons why applying for a credit card now could be a wise move. While in the long term it is far more sensible to have savings in place for bad times, a credit card could help you out of an emergency while you build those savings up. Read on to find out how.

The basic advantages and disadvantages of credit cards

Credit cards allow you to effectively borrow money to an agreed limit. This can be spent on the purchases of your choice and often on cash advances, too. In return, you must agree to repay at least the minimum amount set by the bank each month.

This comes with some basic advantages and disadvantages. Firstly, you have the freedom to spend more than the funds in your bank account allow. You could make a large purchase and then spread the payment over several months, for example.

However, you will be charged interest on any unpaid balance, so this can ultimately make your purchases more expensive than by paying cash or by debit card.

Credit cards need to be used wisely to avoid building up balances that are difficult to pay and also to avoid paying a lot of interest.

What about keeping a credit card as an emergency fund?

Imagine a scenario where your regular income stops or drops. You need to carry on paying your utility bills, for supermarket shopping and more. Ideally, you’ll have some ‘rainy day’ savings to tide you over until your income picks up again.

But what if you don’t have any cash reserves built up yet, or access to help from family? This is where an ‘emergency’ credit card may be useful. You could temporarily pay for essential items and bills using the card.

This should still be considered a last resort, however. This is because you will still need to pay the minimum amount plus you will accrue interest. However, it can bring you valuable peace of mind that the option is there should you need it.

Imagine a second scenario where you are suddenly faced with a large bill. Perhaps an essential replacement for an appliance in your home or a large repair bill for your car.

Do you have the funds to cover such a bill? Again, this is where having a credit card could help you out. With a credit card, you’ll have the means to make such large payments.

It may be prudent to apply for a credit card while you are financially healthy so that you can add it to a portfolio of emergency strategies should problems arise.

What kind of credit card should I look for?

Interested in applying for a credit card? To avoid paying unnecessary fees, charges and interest, you should look for the following features:

Low interest rates

The rate of interest due on balances can vary enormously, some being very high.

If you were to pay your balance off in full each month, this would not be a problem. However, bear in mind that you might not be able to make the full payment and only be able to make the minimum payments. You do not want to be building up lots of interest on your account during  troubled times. So look for the best credit card with low interest rates.

No annual fee for the first year

Some credit cards ask users for an annual fee, perhaps in return for a generous spending rewards program. If your card will be sitting in waiting for an emergency with a minimal or zero balance, it makes no sense to be paying unnecessarily for it. So choose one that charges no annual fee for the first year.

Cash on call

In your situation, it’s worth looking out for credit cards that offer ‘cash on call’. This means that you could transfer a percentage of your credit card limit into your current account to use as needed. This kind of cash advance could be very useful in an emergency situation. You would then pay the amount back in monthly instalments (often between three and 36 months).

Instalment plans

Similarly, some credit cards offer generous instalment plan offers. These would allow you to make a large purchase and convert repayment into monthly instalments at 0% interest. This would give you peace of mind that should you need something in an emergency, you could pay immediately and not pay any interest during repayment.

Rewards programs

If you plan not to use your credit card unless there’s an emergency, there won’t be much opportunity to accrue rewards. Many people, however, use a credit card for everyday spending and pay their balance off in full each month. This allows them to tap into the generous reward schemes many credit card companies offer. This is something worth thinking about.

Some cards offer cashback, or points to be spent on leisure activities and entertainment, travel rewards and much more.

Finally, some important things to consider

  • You must always be able to pay the minimum repayment on your balance each month so you must budget for this when you make any purchase, emergency or not.
  • Building up a large credit card debt may become expensive so don’t allow this to happen unnecessarily.
  • Don’t put all your eggs in one basket with a credit card, as the saying goes. Continue to build up savings as best you can and look at other options should you fall into troubled times.
  • Lastly, consider applying for a credit card sooner or later. Credit card companies prefer to lend to people with a good credit history and a regular income. If you wait until an emergency comes to get one, you may find it harder to get approved.

When used sensibly, credit cards can help you to weather a short term storm. They are useful for emergencies should you have insufficient savings and few other options.

Consider them a potentially important part of your armoury ready for use during these turbulent times. There are some excellent options for low interest cards with no annual fee, so take a look.