Credit cards for emergency fund?

[Captain Cactus]

I was listening to Radical Personal Finance last night and he mentioned upping the credit limit on credit cards for emergency fund purposes.  I don’t think he meant to replace having a traditional emergency fund, but perhaps to be a part of the overall strategy.

He’s got a course on the topic of leveraging credit cards so that’s how it came up. 

I have 2 credit cards, each with a balance of $20,000.  I never get anywhere near that credit limit and pay off each month always.  I could probably up the limit on both cards. 

What kinds of credit limits do you have for yourselves?

Thoughts on using credit cards for emergency fund purposes? 

[Much Fishing to Do]

I think its fine to consider them as a 'probably never/almost never needed' tier of emergency fund (e.g. you have 2 months cash, as you think if you lose your job you'd likely have another by then, but of course its very possible it takes longer you could then have that available).  The opportunity costs of having a ton of cash (if you're young and probably should be fully invested) can really add up over decades.

Obviously make sure one of your cards now has a relatively great rate (not even sure I know what mine are given I always pay them off, so just focus on the rewards) or find one now that does while you have a job.

If and when the event happens that makes you need it it just gives you one more option to consider (e.g. if your investments are at a high maybe its time to cash some in anyway, but if low maybe you don't want to).  Maybe this prevents you from having to pull money out of a Roth (that after 60 days you can't put back in, so its out forever given the annual contribution maximums), knowing that in the end you can always pull that money out to pay off the credit card if it comes to that at some point, etc.

I think its always great to have tiers of emergency funds figured out ahead of time.  I've told my kids they always have a warm bed back home and can eat from the fridge if they ever need it to let them know that that tier, albeit one I know they'd never want to use, is always there just in case.

[Cranky]

$40k seems like plenty for that purpose. You could cover any emergency I can think of...

[ender]

Really it depends on what your emergency fund is supposed to cover.

Open lines of credit aren't guaranteed. People talk about HELOCs for a similar purpose. But there's nothing stopping banks from dramatically lowering the amount available (on either helocs/credit cards).

[cool7hand]

We are already FIREd (me FIREd; wife CoastFire and joining me in June). For all intents and purposes, we use our credit cards as our emergency stash. We don't keep that much cash on hand. Maybe enough for 3 months of expenses. We'd rather have our stash making money and then liquidate what we need, only when we need it. But we would only use the credit cards insofar as they give us another 30 days or so to figure out what to liquidate.

[poetdereves]

For us, it makes more sense to have as much of our money we can being in the market or purchasing other assets. Between the two of us, and because we were really into travel hacking for points for a while, we have well into the six figures of open credit with some of it being at zero percent. If any emergency were to happen, we could easily use our cards up front to cover whatever we needed and then just sell off shares to get us even for a reasonable amount of time.

We keep $2,000 in a savings account to cover our homeowners and vehicle deductibles just in case. This makes DW feel a bit more safe to know that we have this amount, but I would honestly be ok with $0 cash knowing that deductibles can be paid on a credit card too.

Of course, it all depends on where you are in life and where your income is. We are both in stable careers in different fields making six figures, so the chance of us both losing our jobs and all of a sudden having zero income is a very unlikely possibility. If you are single, making lower income, or have a commission job that just makes ends meet I'd reconsider that strategy. We also don't have an issue racking up debt on credit cards and have never really had any personal debt like that. If you've struggled with things like that before it would be another reason to reconsider.

Realistically, whatever makes you sleep well at night. If you have a few extra thousand dollars sitting in a savings account, but stick to all other aspects of disciplined personal finance with even a modest income you will win in the end.

[Dave1442397]

According to CreditKarma, I have $189,700 available on credit cards, and I know my wife has a couple of other cards with maybe another $20-$30k limits.

Right now we only have $10k in cash/savings account, but I would like to bump that up to at least $25k, just in case.

[Rhinodad]

We have over $150,000 in available credit, so plenty to cover any emergency. My wife and I both have stable jobs, and both earn roughly the same amount. We save almost all of 1 paycheck anyways...so we don't have "an emergency fund"...we would use the credit. I'm trying to think what the worst case for us would be...but lets say it's all deductibles/out of pockets for everyone in the family with all vehicles/homeowners/health...and then we also need a new roof, and one of us lost our jobs. So, say $35,000 all in...put that on a credit card, and the market is down all at one time. Interest rate on that credit card is say 12% (easy math), we are talking $420 per month in interest. Say the market is tanked for a complete year...that's $5,000 in interest we are paying, while we wait for the market to recover...vs. having that $35,000 laying around in cash...which opportunity cost is around $3500 per year. I'm willing to take the risk that not all those bad things are going to happen at one time, and will stay fully invested.

[reeshau]

We have kind of done this:  my wife's father travelled extensively around the world.  So when thinking of our credit limit, we imagined a scenario where something happened to him, and we needed to get on a plane to Sydney or Hong Kong today, with an indefinite stay when we get there.  While we could put payments to the credit card while we were away, we imagined some buildup of the travel + hotel costs.  We came up with $25k.  That's been plenty for our whole marriage (FIL is retired now, although he does travel still)  The only time we went to the limit was one time when we bought cruise tickets for my family.

We had a specific purpose, but the card has of course been there for whatever, too.  We never viewed it in place of our cash emergency fund.

[MilesTeg]

I felt like credit cards were a good emergency fund for a while. We kept only about 4-6 weeks liquid (and only that long because our debt load is very low).

Then within a couple weeks there was a terrorist attack on the telecoms industry and an insurrection attempt to overthrow the goverment. I realized that U.S. society is not as stable as I had imagined and that access to electronic payment options might not be available in an emergency.

I think its fine to use them as an extended emergency buffer like a few examples here, but I will no longer rely on them for immediate emergency needs.

[HPstache]

Lots of users here advocate for (and use) credit cards as emergency funds.  The logic is that they provide enough time to round up the money needed from their Roth IRAs and other investments to cover the expense.  This allows members to always have the maximum in the market at all times.  Personally, I appreciate having a cash emergency fund ready at the drop of a hat, but it also hurts to think what that 30K could have done for me over the last 5 years in the market.  Of course everything is obvious in hind sight, market could have had a few down years and I could have had more emergencies happen in the same 5 years...

[NumberJohnny5]

I'm fine with USING a credit card in an emergency, but not with one actually BEING the emergency fund.

A credit card can be turned off for any reason the issuing company sees fit (if they think you'll have problems repaying, think the card might have stolen, whatever). I like having a small amount of cash in case of a dire emergency (need to get out of town NOW, payment processing infrastructure is down, and we need money for fuel food and optionally a place to sleep for the night). A nice buffer in a checking account (over a thousand), and the ability to cash out investments (including IRAs) into the checking account if we're without income for an extended period of time. I would gladly use a credit card for the convenience and the ability to float the payments for a month, but I wouldn't actually rely on them.

[WSUCoug1994]

Although it is a similar approach, we obviously have our share of credit cards but we keep a pretty low cash balance and leverage our Pledged Asset Line against our Schwab portfolio.  it is Libor + 2% so it is much lower interest than any card I have if I need to float some expense for a reasonable period of time.

[ilsy]

Totally CCs for emergency funds. Why not? You can get 18-21m no interest on new cards - plenty of time to pay off whatever emergency you have. And some CCs can transfer the cash to your bank account next day (this thing does bear a 3% one time interest).

My current CL is around >$250k (it goes up every year because I get more cards). I haven't had a traditional emergency fund for several years now because I don't deem it necessary for my situation. But did have a 6m emergency fund in MM account before I started investing in RE. I did write about this somewhere on the forum where people were discussing myths. 

[ducky19]

I have $410,000 in available credit from churning, wife has another $100,000. We always have at least 4-5 0% offers that we consider an additional layer of emergency fund. We keep $4k in an online savings account, plus have an additional $50k in Roth and HSA we could pull from without penalty in a pinch. Honestly, I'd probably use the 0% offers before doing that, but it's good to know the money is there.