Millennials are increasingly concerned about their finances. Instead of setting aside money in a savings account, many millennials are turning to credit cards for their emergency funds, according to an article in Newswire.
While credit cards can provide quick access to funds in the event of an emergency, they are not a long-term solution. When using credit cards as an emergency fund, millennials risk accumulating high-interest debt that they may not be able to pay off in full each month, which is the case with 45% of credit cardholders. This can lead to a vicious cycle of debt that could have a long-term negative impact on their credit scores and financial stability.
Brian Riley, Director of Credit, Co-Head of Payments at Javelin Strategy & Research, noted that credit card delinquencies are rising. This not only puts millennials in a difficult position, but is also bad for the overall economy.
The best way for millennials to prepare for emergencies is to create a traditional emergency fund by saving a little bit of money from each paycheck. By setting aside money in a savings account, they can avoid the high-interest debt that comes with using credit cards as an emergency fund. Incidentally, having a large emergency fund in a money market account is especially good right now, as interest rates pushed yearly earnings to such accounts over 4%.
For those who think they don’t need an emergency fund because they have a credit card with a high limit, it’s important to reconsider that strategy. By creating a traditional emergency fund, millennials can avoid the risks associated with credit cards and ensure their long-term financial security.
Establishing credit is important, particularly for millennials who will soon be in the market for houses. High interest rates make this tough, but according to Riley, now is the time to amp up savings, in preparation for when the economy recovers.