Make this your ‘last resort’ to cover an emergency expense: advisor

People who use a credit card to cover an emergency expense are solving only part of the problem.

Why? Because while using a credit card for emergencies can be helpful in the short term, carrying a balance can lead to significant interest charges if not paid off quickly. 

About 25% of respondents said they would use a credit card to pay for an emergency expense and pay off the card balance over time, according to a new report by Bankrate. That is up from 21% in 2024.

The site polled 1,039 adults in early December.

Paying off unexpected expenses with credit should be “a last resort,” said certified financial planner Clifford Cornell, an associate financial advisor at Bone Fide Wealth in New York City.

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If you don’t pay the balance off, you’re faced with high-interest rate debt. The average annual percentage rate for credit cards is now about 20%, according to Bankrate data.

Let’s say your home water heater breaks — a repair that costs $600 on average, per SoFi. If you put that cost on a credit card with a 20% interest rate, you will pay about $10 in interest if you can’t zero out the balance after a month, according to a Bankrate calculator.

Make only the minimum payments toward that debt, and it will take you more than five years to pay it off, Bankrate estimates. That means you’ll pay nearly $400 in interest.

“Using your credit card to pay for ’emergency expenses’ is just incredibly expensive,” CFP Lee Baker, founder, owner and president of Claris Financial Advisors in Atlanta. He’s also a member of CNBC’s Financial Advisor Council.

Imagine you’re paying this debt off and a new emergency comes up, compounding the problem: “While the timing of these instances can be uncertain, the inevitability of them is not,” said Mark Hamrick, a senior economic analyst at Bankrate.

Individuals who lean on credit cards in emergencies might not have enough savings to cover the tab, experts say.

While “there’s a reason they’re in that position to begin with,” it might not necessarily be rooted in poor financial decisions, Baker said.

“It could be someone younger who has simply not had the time to build up some emergency savings,” he said.

In fact, the same Bankrate report found that only 28% of Gen Z adults — or those of ages 18 to 28 — can pay for a $1,000 surprise expense in cash.

Instead, the group is more likely to pay an unexpected cost with a credit card and pay it off over time.

About 27% of Gen Z adults will finance an emergency on a credit card, compared with 25% of millennials, or adults ages 29 to 44, according to Bankrate data provided to CNBC. 

To compare, 25% of Gen X — adults ages 45 to 60 — would pay for an unexpected cost with a credit card while 21% of baby boomers — those ages 61 to 79 — would do the same. 

Experts urge individuals to create an emergency fund, whether that means putting away even a small amount in a separate account every month. 

Advisors suggest that people should aim for three to six months’ worth of living expenses in case you have big unexpected expense, suffer from a job loss or face major medical bills. But saving that much money “can be a very daunting task,” Baker said.

Instead, “think of it like a ladder” and break it down into smaller, achievable goals to gain momentum, he said.

In the end, “having that cash reserve will really provide a lot of peace of mind,” Cornell said.

If you’re in a situation where you do not have enough emergency savings and need to rely on a credit card, “you’re going to want to pay that down as quickly as possible” to avoid high interest tacking onto the original balance, Cornell said.

If you can’t, Baker says to “absolutely avoid paying [just] the minimum.” Attempt to break the cost into two or three larger payments to avoid incurring as much interest, he said.

A third option to consider is a potential 0% balance transfer card. If you qualify, the card often allows you to pay off the outstanding balance for a set period of time with zero interest, Baker said.

“It can be a terrific opportunity, but you [have] to use it wisely,” he said.