Dubai: While it’s essential to have an emergency fund to help pay for big, unexpected expenses such as a medical bill or an urgent familial need. But what if you don't have an emergency fund? Or your emergency fund balance is too low? You may need to rely on a credit card instead.
“Using credit cards to handle financial emergencies isn't ideal especially if you can't pay back what you've spent on your emergency by the time the bill comes due,” said Abu Dhabi-based credit coach and spending analyst Rajesh Markara, while also stressing how debt balloons given the high interest rates.
However, if you have no other option, debt restructuring experts agree that there are ways to lessen the pain when using credit cards to handle life's emergencies. Here are some such tips, with two UAE residents also sharing their workarounds when they were faced with similar predicaments.
Using credit cards to handle financial emergencies isn't ideal especially if you can't pay back what you've spent on your emergency by the time the bill comes due
• Use the credit card with the lowest interest rates
“If you must charge an emergency on a credit card, use the card with the lowest interest rate. This is especially important when you are charging a large amount that you know you won't be able to pay off in one payment,” added Markara.
The math here is simple, Markara explained: “The higher your card's interest rate, the faster your unpaid balance will grow. So, always use your lowest-rate card for big emergencies.”
UAE-based resident Abin Wilson, who works as a financial analyst in Dubai, faced a similar debt-related crisis a few years ago when his father passed away in India. With the unforeseen circumstance having happened when he barely had any savings stored up, he was forced to add more debt to his credit card.
“I couldn’t repay my emergency charge in one month, so I knew before matter got worse debt-wise, I needed to come up with a game plan and determined how much money I can spare each month to cut down on my credit card debt, and apply those extra dirhams to it,” revealed Wilson.
Possible solution: Create a repayment plan
The debt dilemma only worsens if your credit card debt further adds on to your home loan, as it did in Wilson’s case. Your goal is simple: It is to pay off your credit card debt as quickly as possible, advised Dubai-based personal finance coach Mirin Raul, who coaches people on money-related issues.
“Maybe you send an extra Dh100 each month to your mortgage payment. If you have outstanding credit card debt, shift that Dh100 to your credit card bill instead. Mortgage debt comes with far lower interest rates than debt associated with credit cards. You should always pay off your debt with the highest interest first; it is costing you more, after all.”
• Transfer balance to a zero-rated introductory credit card
If you've created your repayment plan and feel you can realistically adhere to it, you might be able to pay off the debt even faster and save some money by doing a ‘balance transfer’.
“If your credit is good, you can get approved for a card that offers a zero per cent introductory rate on balance transfers for up to 21 months. That gives you a good chunk of time to pay off your emergency expenses without paying interest,” added Markara.
“However, keep in mind that you'd need a card from a different bank than the one you're trying to transfer a balance from, and interest rates on these cards are typically very high, which means that if you don't pay off that balance during the intro period, you'll get stuck with a high interest rate debt and make you worse off than before.”
Finally, there is usually a balance transfer fee, though there are some cards that offer Dh0 balance transfer fees.
• Paying minimum monthly payment forces you to owe more
“Using a credit card for financial emergencies isn't necessarily a bad thing. Not paying your credit card balance in full each month, however, can really cost you. And you're more likely to not pay that balance off if you've just charged Dh10,000 or more to handle an unexpected financial crisis,” added Markara.
This is predominantly because credit cards come with sky-high interest rates. The average interest rate worldwide on credit cards stood at 16.7 percent as of September. This means that if you don't pay your balance off in full each month, your credit card debt can grow quickly, especially if that balance is high.
Don't think paying your minimum required monthly payment solves the problem, either. Danilo Bautista, another UAE resident, regretted making this mistake when swiping his credit card to take on a urgent family home repair back home in the Philippines in 2015.
Using a credit card for financial emergencies isn't necessarily a bad thing. Not paying your credit card balance in full each month, however, can really cost you
“My credit balance only snowballed. I tried to pay a little more than the minimum due after swiping Dh17,000 in one go – but I kept putting it off. I further regretted this move after I lost my job a year-and-a-half since my liabilities rose,” added Bautista, who added it took him six years to get out of the spiral caused by a seemingly small debt amount, and he did so by painstakingly taking a lower-rate loan.
Raul explains it this way: “Let’s say you have Dh4,000 in credit card debt at an interest rate of 17 per cent, it will take you 144 months to pay it off if you only pay the minimum each month. You will pay more than Dh3,000 in interest during this time.”
“Also, that's only if you don't add any more money to your card's balance during this period. This is why it's so important to do whatever you can to pay off your credit card debt — including debt generated because of financial emergencies — as quickly as you can,” added Raul.
“Building an emergency fund isn't complicated, it just takes discipline,” said Raul.
“Start small if you must: Put Dh100 a month into a savings account. If you can put in more, do it. Your goal is to build an emergency fund that can cover six to 12 months' worth of daily living expenses. That way, you'll be covered if an emergency strikes.