At a time when record-high inflation is driving up consumer prices, an emergency fund can help you financially prepare for unexpected expenses like home repairs, car maintenance, and unexpected medical bills.
Experts recommend that consumers should have enough emergency savings to cover up to six months of household expenses, but most Americans don’t have such a robust safety net, according to the TIAA Financial Wellness Survey 2022.
While 78% of respondents said they had an emergency fund, only 45% said it could cover six months of living expenses should they lose their job.
Without sufficient emergency savings, consumers can turn to high-yield credit card debt to fund unexpected expenses. And amid rising inflation, U.S. credit card balances are growing at a record pace, the Federal Reserve reports.
Read on to learn more about how to build your emergency savings and pay off debt accumulated due to unplanned expenses. You can visit Credible to compare interest rates on a variety of financial products, from high-yield savings accounts to debt consolidation loans.
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Tips for building an emergency fund
A solid emergency balance ensures you don’t have to rely on credit card spending to cover unplanned expenses. It may seem daunting to grow your emergency savings fund when you’re starting from scratch, so follow these tips to get started:
- Create a budget to calculate your monthly expenses and savings goal.
- Determine how much money you need to cover up to six months of expenses.
- Dedicate extra money and unexpected cash gains like tax refunds to your emergency savings account.
- Set up a direct deposit from your paycheck to a bank account.
- Open a high-yield savings account that uses interest to build your safety net.
On Credible, you can compare interest rates for high-yield savings accounts and multiple online banking institutions at the same time.
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3 ways to pay off debt due to unexpected expenses
Consumers might be tempted to turn to credit cards in a financial emergency, but revolving credit card debt comes with high interest rates and expensive borrowing costs. If you’re looking for ways to cash out your credit card balance, consider these tactics:
- Balance transfer credit cards
- Debt Consolidation Loan
- Nonprofit Credit Advice
Read more about each debt management strategy in the following sections.
1. Balance transfer by credit card
It may be possible to save money on your credit card debt by opening a balance transfer card with a lower interest rate. In this way, you can transfer the balance of one or more credit cards to a new credit card with more favorable repayment conditions.
Keep in mind that they may charge a balance transfer fee of up to 5% of the total amount and there may be account transfer limits.
Some credit card issuers offer balance transfer credit cards with a 0% APR introductory period that can last up to 21 months. However, these promotional offers are reserved for applicants with very good or excellent credit scores, defined by the FICO scoring model as 740 or higher.
You can visit Credible to compare balance transfer cards, some of which may offer an interest-free introductory period.
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2. Debt Consolidation Loan
A debt consolidation loan is a type of unsecured personal loan that can be used to pay off virtually any type of debt, from credit card balances to medical bills. Personal loans offer predictable monthly payments that you pay back at a fixed rate over several years.
According to the Fed, interest rates for personal loans are currently at historic lows. The interest rate you qualify for depends on your credit rating and debt-to-income ratio, which is your monthly debt payments divided by your income. Applicants with good credit receive the cheapest offers, while applicants with poor credit can see higher interest rates.
Most lenders allow you to pre-qualify to view your estimated interest rate with a gentle credit check. This allows you to research the best possible deal for your financial situation before completing a formal application.
You can compare debt consolidation loan rates on Credible for free without hurting your credit score. Then use a personal loan calculator to estimate your monthly payments.
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3. Nonprofit Credit Advice
If you’re looking for ways to pay off debt but don’t have the necessary credit history to qualify for personal loans or transfer credit cards, you should consult a credit counseling agency. A certified credit counselor can help you create a budget, manage your debt, and negotiate with your creditors on your behalf.
Depending on your financial situation, a credit counselor may enroll you in a debt management plan (DMP) to pay off your debt in fixed monthly payments. DMPs typically come with a small monthly fee that can be waived if you reach certain income thresholds.
A full list of accredited credit counseling agencies can be found on the Department of Justice website. You can also visit Credible to learn more about your alternative debt management options, such as: B. Credit card consolidation loans and balance transfer credit cards.
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