Sometimes you just hit a string of bad luck — the transmission in your car fails one day, the dog has an emergency veterinary visit a few days later, and then your refrigerator dies.
There are going to be weeks when your best planning, budgeting and saving can't hold up to life happening.
When your emergency fund can't sustain everything all at once, two of the most commonly used options are getting a personal loan or using a credit card. Here's what you should know about both options, including the effect on your credit score, repayment flexibility and which option you should choose.
There is a basic rule of thumb: In general, a credit card might be best for short-term emergencies that you can repay within weeks. A personal loan might be better for larger expenses that you know will take a bit longer to repay.
About Using Credit Cards
There are a few benefits of using a credit card: A credit card can work well if the cost is relatively small and you already have available credit to use. This way, you won't have to spend time applying for a new credit card or loan, you can just cover the expense and start working on paying it back before you start paying interest on the item or event. If you have a no-interest introductory offer on a credit card that you already have, or if you can get credit card points that you're sure you will put to good use, you can take advantage of those offers.
However, using a credit card for a one-off, big expense might hurt your credit score by affecting your ratio of available credit to used credit.
Plus, if yet another emergency comes up or your income changes, your repayment priorities might shift.
About Getting a Personal Loan
A personal loan may work better for bigger emergencies that you know you won't be able to pay back immediately. There's one key reason: Most personal loans come with lower interest rates than your standard credit card.
When we talk about a personal loan here, we're talking about a short-term loan from your credit union, not a payday loan or title loan, which comes with significant risks and high interest rates.
A personal loan can come with an interest rate that's half (or less) than your credit card's interest rate, and it typically comes with standardized, monthly payments and a payoff date so you aren't carrying that loan for long.
There are disadvantages, though: You have to apply and that will show up on your credit report, and you will want to look at loans that have low (or $0) origination fees. You'll also need a decent credit score to get the lowest available rates.
A Combination Approach
There is a third way to handle an emergency expense that might give you the benefits of both using a credit card and a personal loan — put that expense on a credit card and pay the credit card of as quickly as possible by getting a lower-interest personal loan. That way, you can take care of the expense quickly, get those credit card perks and avoid high-interest payments.
No matter what you decide to do, CommonWealth One has you covered! We offer Visa Signature Rewards, Platinum Rewards and Platinum credit cards, all with low rates and perks like CURewards points and lots of protection for your purchases and travel.
CommonWealth One also offers a variety of personal loans with even lower rates than our great Visa credit cards!
We understand that unexpected expenses and emergencies can happen, and we don't want it to derail your financial plans. We're here for you, for life, and for whatever life throws at you this summer.
