Credit Card Advice: Dealing with financial emergencies

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Dealing with financial emergencies

As with all financial matters, forward planning can help reduce the impact of a financial emergency:

Prevention is better than cure: Is your boiler regularly serviced? Is your car well maintained? Have you taught your children about the importance of budgeting?

Set up an emergency fund. Some people talk about “saving for a rainy day”, and your emergency fund should be on a similar basis. Work out what sort of figure would cover you in the event of any of the events above occurring. Your emergency fund should be a minimum of £1000, and ideally should be around three months’ salary of the major earner in the household. It should be kept in a high interest savings account, but it should be instantly accessible via a cash card, or better still a Visa debit card.

An alternative is to have an emergency credit card available, with a sufficient credit limit to cover any needs in such circumstances. However, this is much easier to abuse than a savings account, and with all your other monthly outgoings such a card could take several months to pay back. However, credit cards do have the advantage of being on hand to pay a plumber or garage in the event of a late night breakdown, and they are more secure than having to go to a cash machine late at night to withdraw funds. Cash cards are usually restricted to daily withdrawal limits of around £200, which may not be sufficient to meet your needs.

If you do decide to have an emergency credit card, then you should aim to balance this with a savings accounts with a notice term no longer than one month. This will allow you to ensure that any balance generated by a financial emergency event is repaid in full by the time the statement arrives the following month. Although interest might not be your primary consideration for such an emergency fund, if you feel that the 0.5% rate you are offered from your high street bank is not worth bothering with, then you may wish to consider premium bonds. These can be repaid by giving one month’s notice, and effectively pay interest by giving you the chance to win £1,000,000 in their monthly prize draw. Based on the current relative interest rate of 2.4%, you may expect to win a prize of at least £50 once every 12 months or so on a typical fund of £2000. You will notice this far more than an occasional trickle of interest, and all winnings are tax free.

Go to our glossary section for a full definition of a financial emergency.

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