Credit Card as emergency funds

A recent discussion I had during a livestream was about using credit card as an alternative tool for emergency fund. This is a very important topic these days due to the global economic uncertainty.

In light of the global pandemic outbreak, you may have heard the saying, “cash is king," although I agree but this also needs to be contextualized as not all people's circumstances and situations are the same.

High-interest debt can turn

an emergency into a catastrophe

Sometimes it worked. Sometimes their problems only grew worse. This highly depends on a person's financial discipline and habits.

Debt is bad enough, but high-interest debt can be catastrophic. And that leads us to yet another problem if you use credit for emergencies: If you have an actual financial emergency, you will pay interest when you carry a balance from month to month.

When to use your credit card during an emergency?

Credit cards come with myriad benefits, such as rewards and consumer protections, and can be a financial lifeline on rare occasions. A credit card is one of the few times I recommend using them as often as you can to maintain your cash reserves.

Also it’s fine to use a credit card in an emergency — as long as you have cash to pay off the balance before interest starts accruing. To better guarantee this, you may want to consider using a rewards credit card with a lengthy interest-free intro period.

Carrying a credit card can also be the more secure option when leaving the house, such as going on a grocery run. It is much safer than walking around with a lot of cash in your pocket.

Bottom line

Unless it’s a life-altering kind of situation, it’s best not to rely on credit card debt or a line of credit in place of emergency savings. Obviously, there’s the high cost of compounding interest. Rolling over your balances from one month to the next leads to more interest payments.

And, if you treat your cards as a source of available funds, like an ATM if you will, you’re likely to get into the habit of just charging it, and rebuilding your debt balances higher again.

Depending on your personal financial situation, it can be ideal to have both credit cards and cash on hand during emergencies. If you want to avoid the roller-coaster of being thrown deeper into debt, you need a plan that focuses both on debt reduction and disaster recovery.

Credit Card Fraud

In relation to the above, the Credit Card Association Philippines (CCAP) reported that as the pandemic caused payments to shift from card-present (CP) or face-to-face transactions to card-not-present (CNP) such as remote payments and other digital payments, fraudulent activities proliferated.

“Fraud happens more often in cyberspace, given that it is easier to facilitate there. It does away with the need to secure a physical card and more importantly, it is a safer option for the fraudsters because of the anonymity that the internet provides,” CCAP executive director Alex Ilagan said in an advisory.

CCAP reported that one type of prevalent fraud is called an account takeover. This involves acquiring a physical card or its details along with the cardholder’s one-time-password to complete online transactions.

Scammers and fraudsters normally use social engineering to deceive cardholders into giving sensitive personal information and card details. They usually pretend to be representatives of a bank, phone company or even from a government agency.