Dos and Don’ts of using your credit card during emergencies

Dos and Don’t of Using Credit Cards in Emergencies

Do’s

1. Evaluate the situation

Assess the urgency of the situation before deciding about arranging for funds. Explore possible workarounds to tackle the situation. Use your credit card as a last
resort to avoid unnecessary debt.

2. Know your credit limit

If you have a credit card or cards, know your cumulative credit limit. In an emergency, it is easy to lose track of how much of your credit limit you may be using. If you know your limit, calculate 30% of it and avoid spending over that amount to stick to a recommended credit utilisation ratio (CUR). If you max out your credit card or exceed your CUR, it can negatively impact your credit score.

3. Understand the terms and conditions of your card

Read and understand the fine print of the credit card’s terms and conditions. Pay special attention to information related to interest rates, penalties, fees, and late
payments. With this, you will know the scope of your liability regarding your credit card and can use it smartly.

4. Pay your dues in full

Whenever you use your credit card, especially in an emergency, pay your outstanding bill in time. A delay in bill payment means late penalties and interest will accrue on the outstanding bill and drive up your debt. Making a minimum payment will help your card remain active but interest will keep accruing on the outstanding balance as well.

5. Choose your card wisely

A credit card that aligns with your lifestyle can go a long way in helping make your life easier. Choose a card that offers low interest but is suited to your needs. This will keep your interest outgo in check and make debt management easier.

Don’ts

1. Don’t use cash advances

Credit cards also offer the facility of cash advance allowing you to withdraw money from your credit card account, typically via an ATM. This facility, however, often
comes with a high fee and interest rates, making it a costly option that must be avoided unless necessary.

2. Don’t ignore your credit card statement

If you have used your card in an emergency, make sure you go through your bill statement carefully and ensure that all charges are accurate. This will help you track your spending.

3. Don’t make unnecessary purchases

Before you use your credit card during an emergency, identify the necessary expenses you will need to use it for. This will help you identify and eliminate the unnecessary expenses which you needn’t spend on. This exercise will give you an idea of how much you need to spend and prepare a repayment plan accordingly.

Conclusion

Credit cards can be extremely useful in emergencies but if used carelessly, can be vehicles of debt. In contrast, one of the most effective ways to prepare for a rainy day is to build an emergency fund that is worth at least 6-9 months of your regular, necessary expenses. If you have no option but to use your card, do so prudently by understanding how to use it responsibly to minimise the impact on your financial health.

Adhil Shetty is CEO of BankBazaar.com