Emergency expenses are the reason for credit card debt for 43% of Americans, and here's how much it's costing them.

A recent Bankrate report shows that the number of Americans carrying a credit card balance is increasing, as many use their credit to cover unexpected or emergency expenses.

In late November, Bankrate surveyed 2,350 U.S. adults and found that the percentage of credit card holders with a balance increased from 39% in 2021 to 49% in 2021.

The Federal Reserve reports that the average interest rate on credit card debt has increased from 16.45% in 2021 to 22.77% in October 2023, likely due to the rise in credit card debt costs over the past two years.

A majority of people with credit card debt claim they carry a balance due to unforeseen or emergency expenses, typically medical bills or home and car repairs. Nonetheless, financial experts advise against using credit cards to finance these expenses if possible.

Why credit cards shouldn’t be used for emergency expenses

Experts advise against using credit cards for debt financing due to their typically high interest rates. To avoid accumulating debt, it is recommended to keep your monthly balance at zero.

It is better to pay the monthly minimum payment than not paying at all, but these payments only cover a small portion of the total debt. The longer you take to pay off the balance, the more interest you will accrue, as it accumulates daily.

An example of how interest can cost you even if you pay more than the minimum payment is when you want to pay off a $5,000 balance on a credit card with a 22.7% interest rate within a year. You would need to make monthly payments of $469, which would result in $636 in interest charges for the year, according to Bankrate.

If you took 24 months to pay off the same balance, your monthly payment would be $261. In that case, your total interest costs would double to $1,267, which is more than a fifth of the original balance.

David Haas, a certified financial planner in Franklin Lakes, New Jersey, advises clients that a credit card is not an emergency fund and should not be used to overspend, emphasizing the importance of paying the bill in full each month.

Use an emergency fund to cover unexpected expenses instead

Financial planners commonly recommend having an emergency fund that can cover three to six months of expenses instead of relying on credit cards for expenses that can't be quickly paid off, says Haas.

Paying off high-interest credit card debt may make it challenging to start building an emergency fund if you don't already have one.

John Cooper, a CFP in Hodges, South Carolina, suggests contacting your credit card company and requesting a lower interest rate, a pause in payments, or to have late fees waived to help lessen your debt burden.

You can also look for balance transfer credit cards that offer a promotional interest rate of 0% for a set period, allowing you more time to pay off your debt.

Consolidating your debts into a personal loan can help lower interest rates and make debt more manageable to repay, especially if you have multiple credit cards with outstanding balances.

Qualifying for good rates on personal loans requires a good credit score. Additionally, some loans are secured, meaning they are backed by collateral such as a home or car, which could be lost if payments are not made on time.

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