The No. 1 reason why many Americans say they're not saving more for emergencies and retirement

A rainy-day fund can be "our best defense against turning to high-cost debt when an unexpected expense arises."


Saving money in an emergency fund and for retirement can be a challenge on its own. It gets even harder for Americans when they're dealing with credit card debt.

Researchers at the financial resource website Inside 1031 polled 1,000 U.S. adults with at least one credit card about their usage, current debt, and barriers in the way of paying it down. More than a third, 35%, of those with an outstanding balance said their debt is stopping them from putting more money into emergency savings. The same percentage said it gets in the way of other financial obligations, and 32% said their retirement savings are affected.

"It's often a one-time shock, [like] a big medical bill, unexpected home or car repair, or a job loss," that gets people in trouble, says analyst Ted Rossman. Many of those setbacks have been difficult to recover from during the Covid crisis.

Since March 2020, according to the survey, 44% of respondents said they increased their card balances, while roughly 49% say they depend on credit to cover their necessities. "This speaks to the K-shaped recovery," he adds, and "gets back to 'the rich get richer, the poor get poorer' theme."

Though many people spent less during the pandemic and improved their situations by using their stimulus funds responsibly, "the improvements haven't been shared equally."

'Stop using that card until you have a plan to pay the balance off'

Over half, 55%, of consumers Inside 1031 polled carry a monthly balance, which could further stifle saving. People with a monthly balance are three times more likely to have no emergency fund, the data shows, and more than twice as likely to have less than $500 set aside.

If you want to eliminate your credit debt to focus on other goals, aim to pay more than the minimum balance, experts say. But if you can't afford to, then "any of your unnecessary expenses should be put on hold," says Colleen McCreary, chief people officer and financial advocate at Credit Karma. "Do everything you can to avoid missing a payment entirely."

Do everything you can to avoid missing a payment entirely.
Colleen McCreary
Credit Karma

Once your essentials are taken care of, it might make sense to "stop using that card until you have a plan to pay the balance off," she adds. "Revisit or create a budget where you project any expenses … and build out a payment schedule to keep yourself on track moving forward."

The ideal state is to have a sufficient emergency cushion and zero credit card debt, Greg McBride, chief financial analyst for Bankrate, previously told Grow, but "the reality is that it often takes years to get there. Regularly contributing to, and building, your emergency savings while focusing on paying off credit card debt are markings on the pathway to future financial security."

An emergency account is often the 'best defense' against unexpected costs

Americans have an average credit card balance of $5,525, according to credit bureau Experian's latest findings, and those who are paying it down are using tried-and-true strategies. Nearly half, 49%, of the Inside 1031 respondents say they limit their spending to what they can afford to fully pay off. Over a third, 36%, reduced discretionary spending, and the same percentage lowered their credit card spending by using other forms of payment.

Using a balance transfer card could also help: It lets you transfer debt from a high-interest card to another card with no interest from anywhere between a year to 20 months. Reach out to your card issuer if you need more assistance. They could give you a lower interest rate, allow you to create a payment plan, or offer temporary forbearance if you're experiencing financial hardship.

How people with 10+ credit cards make it work

Video by Mariam Abdallah

With the money you potentially save, consider setting up automatic transfers to a high-yield account so you're regularly contributing to your goal. Money advisors typically suggest putting at least 3 to 6 months' worth of living expenses toward an emergency fund. Having even $1,000 stashed away is a start, as long as you make it a priority to contribute whenever you can.

A rainy-day account is "often our best defense against turning to high-cost debt when an unexpected expense arises," says Rossman, especially since "credit cards may not always be there in emergencies." When you secure your finances, he says, "more avenues will open up."

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