Emergency credit card a good idea -- if used wisely

By Marianne Curphey

If a financial emergency arises, would you turn to a credit card to tide you over while you sort out your money and get back on your feet?

If so, you are not alone. A March 2015 HSBC survey shows that almost 9 million households have less than £250 set aside as a safety net in the event of redundancy. A quarter of those questioned had no emergency savings at all. Nearly one in 10 said they would turn to unsecured lending, such as credit cards, store cards or a personal loan, to finance their monthly outgoings and 8% said they would rely on their overdraft.

Life is full of unexpected events, so is keeping a spare credit card for just such emergencies a good thing -- or will it count against your credit score?emergency-card

"Generally speaking, it's OK to [keep a card for emergencies]," says
James Jones, head of consumer affairs at the credit reference agency Experian. "That's what credit cards are for: to smooth out the peaks and troughs in your financial life and help you cope with unexpected financial demands."

Plus, many credit cards provide purchase protection, which can give you peace of mind in an otherwise stressful time. Chosen and used correctly,
an emergency credit card can be an excellent tool to have in your wallet.

Skip the frills
There is little point in choosing a rewards card or a card with a lot of perks and a hefty annual fee if you plan on using it very little. Go for a simple card that is truly going to be for emergencies only.

Search for a low-interest card
There are plenty of lengthy 0% interest deals on the market right now, but they aren't necessarily the best choice for an emergency card.

You don't know when you'll need to make that emergency purchase. If it's near or after the end of the introductory deal, you could end up with a card that charges the same or more interest as other cards out there. Additionally, if the situation is truly an emergency and you have to miss a payment or make it late, you might break your 0% interest contract and end up paying interest not only on the remaining balance, but retroactively on the original balance.

Use it, pay it off regularly -- even if you don't have an emergency
Say you've had your emergency card for a while and taken good care of it by making a few purchases on it throughout the year that you pay off quickly. Even if you never have an emergency, you'll have built up a good repayment history.

That good history can improve your credit score over time, and perhaps get you better deals on credit in the future, Jones says.

Plus, not using the card regularly can result in some negative consequences. First, suddenly charging a huge amount to a rarely- or never-used card can raise a red flag with your issuer, who may think your card has been compromised and could freeze the card without letting the purchase go through. If you need to use a seldom-used card, call the issuer first to explain your situation.

In addition, if you let the card sit unused, you may end up with an inactivity fee or your issuer may even cancel your card. It's unusual for card issuers to charge such a fee, but always check the fine print.

Stick to a repayment plan
The whole point of your emergency card is to come to your rescue when your refrigerator breaks, or your car needs major repairs, and your bank account doesn't quite have the padding to cover it. Don't be afraid to charge that hefty purchase, but also don't forget you need to have a plan to pay it off.

If possible, plan to make more than the minimum payment each month to reduce interest costs. 

Yvonne Goodwin, a financial adviser and wealth planner, suggests setting up a direct debit to ensure you stick to your repayment plan. Include the repayment in your budget for however many months it'll take to clear the balance.

It's also a good idea to decide how much of an emergency cushion you're comfortable having. You can determine that limit by figuring out how much you could reasonably pay back per month and giving yourself a period in which to pay it off. If you don't want to pay for longer than six months, and you know you can't pay back more than £1,000 in that amount of time, don't get a card with a limit over £1,000.

Wilma Allan, a money coach and founder of The Money Midwife, says the crucial thing is to be disciplined.

"It is important to set standards and agreements with yourself about the way you handle your money," Allan says. "It is all about being realistic about your plan. The card company is not going to have a problem with extending credit to you, so it is up to you to think about what happens when you need to pay it off -- otherwise it is not financial planning, it is just wishful thinking."

See related: 9 good habits of clever credit card users, Prioritising debt: Which bills are essential?

Published: 27 May 2015