Millennials may be using credit cards as a 'de facto emergency fund'—here's why they shouldn't

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Millennials are the most likely generation to have more credit card debt than emergency savings, according to Bankrate's "2023 Annual Emergency Savings Report."

About 45% of millennials (ages 27 to 42) and 44% of Gen Xers (ages 43 to 58) report owing more on their credit cards than the amount of money they have saved up for potential emergencies, the report found. Bankrate surveyed 1,032 respondents in English and Spanish from Jan. 20 to Jan. 23, 2023.

On the other hand, only a quarter of boomers (ages 59 to 77) and about 38% of Gen Zers (ages 18 to 26) say they have more credit card debt than emergency savings according to the poll.

Gen Xers were also most likely to use a credit card to pay for an unexpected $1,000 expense rather than their savings, the survey found.

This may mean that both of these groups are overly relying on credit cards, says Melinda Opperman, chief external affairs officer, at Credit.org.

"When whole generations have more debt than emergency savings, that suggests they've been using credit cards as their emergency fund," she tells CNBC Make It. "That has to stop!"

Other experts agree. Many millennials and Gen Xers see their credit card as a "de facto emergency fund," Matt Schulz, chief credit analyst for LendingTree, tells CNBC Make It.

But that line of thinking can trap you in expensive debt in the long run.

Although credit cards can give you the ability to pay off a purchase over time, costly interest charges on your unpaid debt can also cause the amount you owe to balloon quickly. As of February, the average credit card interest rate is 23.55% according to LendingTree's latest analysis.

"Unless someone has a path towards quick repayment, [credit card debt] becomes problematic," Mark Hamrick, Bankrate's senior economic analyst, tells CNBC Make It. "It doesn't replace savings because savings is, essentially, our own free money."

But for many, high inflation is making it harder to save right now, regardless of generational group. Nearly 70% of survey respondents said that rising prices have caused them to save less, up from 49% in January 2022.

How to balance building your emergency savings with paying down credit card debt

If you're someone who has more credit card debt than emergency savings, focus on paying off the debt first, says Opperman.

"Pay off the debt first, and then put the money you were paying every month to service that debt toward savings," she says.

Two common ways to tackle credit card debt are the snowball method and the avalanche method.

The snowball method involves paying off your smallest debts first, regardless of interest rate, and working your way up to your larger ones. When using the avalanche method, you pay down the balance with the highest interest rate first, then work your way down to your least expensive debt.

However, it's important to put money toward your emergency savings as well, even if it's not very much, Opperman says.

"If your budget only allows for a very small amount of emergency savings — say 3% of your income — that's OK at first," says Opperman. "The point is to establish a habit of saving and nurture it even while you're paying down debts with the bulk of your discretionary funds."

And boosting your savings can help you avoid accumulating more credit card debt when you're hit with an unanticipated expense in the future.

"So many Americans pay off their credit card debt only to see the next flat tire or trip to the veterinarian have to go on their card because they don't have any other way to pay for them," says Schulz.

"Savings is the key to breaking the cycle of debt that so many people can't seem to escape from," he adds. "If you have savings, it means that when you finally get your credit card balances down to $0, you're more likely to keep them there."

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