A Credit Card Isn't an Emergency Fund

Many people consider a credit card their emergency fund. While convenient, it's rarely a good idea for most people, especially during times of economic turmoil.

There seem to be two reasons that people opt for the credit card as an emergency fund rather than building a stash of cash in a savings account: the time it takes to raise enough money and the paltry interest earned from a bank account. Here are a number of reasons to reconsider.

Better interest rates: Placing emergency-fund money in an investment that earns a better return than a savings account usually relies on the false assumption that some securities always rise. Stocks and other investments can be volatile, especially in the short term.

Since by definition an emergency occurs unexpectedly, money invested in other financial vehicles might need to be withdrawn at any time. This includes times when it isn't financially in your best interest to do so.

Time factor: There is no doubt that it takes time and discipline to build up an emergency fund. In doing so, you may even need to use a credit card as an interim safety net. But, eventually, you will have saved enough money.

Credit card limits can be reduced: Credit card companies, to reduce risks, are lowering spending limits, even on cards whose owners have good credit. The likelihood of a reduction increases as your financial situation worsens. If you lose your job or fail to make payments on some debt obligations, it's possible your credit card limit will be cut.