Don't let financial emergencies ruin your credit score.
Even the best financial plans can run into hiccups, bumps, and outright obstacles. If you’re not prepared to handle financial emergencies—with a plan for how to get through them—you could end up taking a huge hit to your credit score, which will put you in even greater financial danger down the line.
Think about planning for financial emergencies the same way you’d think about planning for a natural disaster. A well-prepared home has an emergency first aid kit, extra food, and family meet-up plan in case of an earthquake or similar disaster. Likewise, having an emergency fund ready to go in case of an unexpected expense will help ensure that you and your family make it through the worst unscathed.
If you want to keep the bad credit wolves at bay, then the time to start planning for future financial emergencies is right now. That’s why we spoke to the experts to learn what you have to look out for and how you can overcome it.
Medical emergencies: in sickness and in health
Some of the most common financial emergencies people have to deal with are, unfortunately, medical emergencies. It’s common enough that we’ve actually written about it before. Even if you have the shiniest medical insurance on the market, you can still get saddled with massive medical debt if you aren’t prepared (and even if you are).
Leadership coach Elizabeth McCourt gave us her personal take: “A major unexpected financial emergency is illness, either of yourself or someone that needs you to help take care of them (partner, parent, etc.). Making sure you have insurance for yourself is especially important. If you’ve got to leave your job to take care of a loved one, that’s a big decision and does have financial ramifications. As much as your head is spinning, try to work out a plan, perhaps even confide in someone outside the situation, so you have some perspective and clarity in order to take care of yourself and your responsibilities.”
But humans aren’t the only ones who get sick…
Pet emergencies: furry friends in need
The feathered, furry, and scaled among us also run into medical emergencies. You care about pets as much as your children, or maybe more. We won’t tell. The point is, if they’re sick, you aren’t going to want to spare any necessary expense.
Kendal Perez, a savings expert with CouponSherpa.com, told us about a medical emergency she went through with one of her pups:
“When my two dogs were just 12 months old, we had to take one of them to the emergency vet because he wouldn’t eat and started throwing up blood. We had no idea what caused the issue and the vet couldn’t identify it, either. We spent most of the night at the emergency vet, and then another day at our regular vet, followed by one more night at the emergency vet until they finally realized what happened. Luckily they were able to treat him once they determined what happened, but not after two pricey nights and one expensive day at vet clinics.
“The timing of this emergency was ideal in that we’d just done our taxes and received about $1,500 in return. The total vet bill was around $1,700 and since we saved our tax return instead of spending it on something frivolous, we could easily pay the vet bill without going into debt.”
Aside from building up an emergency fund, you could also consider pet insurance. Yes, it exists, and yes, we wrote a whole article about it.
Unemployment Emergencies: Pink, the worst color of slip
Of course, unexpected expenses aren’t the only form of financial emergency. You could also lose your source of income.
“One major financial emergency that a lot of people have gone through is the loss of a job,” warned Alayna Pehrson, digital marketing strategist for BestCompany.com. She went on to tell us how you can keep sudden unemployment from affecting your credit too negatively:
“Although unemployment doesn’t directly affect a credit score, it can indirectly lower the score if there are late payments, high debt, and an increase in credit card balances. It is important to maintain a good credit score during unemployment because many employers perform credit checks before they hire. Without a good/decent credit score, there could be a loss of a potential job. Although it can be difficult to keep up a credit score and be unemployed, it is not impossible.
“A way that can help with keeping your score up during unemployment is to get in touch with creditors to discover if there are any programs or plans that can help you with your monthly payments while you are jobless. Typically, there are many options out there that people don’t know about.
“Another way is to pay the minimum amount due instead of the entire balance. This will help your money last longer and keep you out of credit trouble.
“Lastly, it is important that you don’t cancel your credit cards immediately after you lose your job. Although this may seem like a good idea to avoid debt and credit mishaps, in the long run, canceling credit accounts will drop your score. Your score is based on your credit card usage and ownership. If you decide to cancel cards, it is recommended that you keep at least one card to your name.
“Overall, the best way to prepare for an unexpected financial emergency such as unemployment is to make sure you have a good score to begin with. Cleaning up your report, making sure your credit is repaired as needed, and taking care of your debt beforehand will give you a major head start in case you are hit with unemployment.”
For more advice about how to manage the loss of your job, check out this article we wrote on the subject.
So how can you handle it?
You need a plan to start preparing for financial emergencies before they happen. Here’s what McCourt suggested, based on advice from her father:
“There are many reasons that there’s a golden rule of having at least three months of expenses saved in a slush account. (Cars break down, roommates leave, phones break, relationships split-up, taxes must be paid, etc.). My father, a math teacher, probably said it best: don’t live above your means. This doesn’t mean you shouldn’t have fun, but if there is more money going out then coming in, you might have the answer to your problem. Maybe just thinking about the question, ‘what happens if I have a financial emergency’ could help you in preparing for what might happen.”
Certified financial educator Maggie Germano offered a full guide on how to ready yourself for financial emergencies:
“Financial emergencies include anything that requires an immediate solution in order for you to be safe, healthy, and provided for. This can be your car breaking down when it’s your only way to get to work, a leaky roof that is causing your home to flood, a medical emergency that requires you to go to the hospital, etc.
“The best way to deal with a financial emergency is to be prepared for them ahead of time. That’s why you need an emergency savings account to protect you. Experts say everyone should have 3-12 months worth of expenses saved in their emergency fund account. If you are self-employed, or have a family to support, you want to be on the higher end of that spectrum. And that amount can change depending on shifting circumstances.”
She even has a comprehensive guide to building up your savings:
“1. Automate! The easiest way to save is to set it and forget it. Set up direct deposit from your paycheck, or have your bank make scheduled transfers. This way, you don’t have to think about it and you won’t miss the money. You’re way more likely to save when you do this.
“2. Choose a high yield savings account. These days, you don’t get much back in terms of interest, especially from brick or mortar banks. Open a savings account with an online bank like Ally or Synchrony, and you can get up to five times the typical interest rate. Before switching to Ally, I only earned 20 cents a month in interest and now it’s more like $15.
“3. Don’t connect it to your checking account. You need your emergency fund to be accessible when an issue arises. You don’t want it to be in a CD or the stock market, where you can’t get to it easily. However, you don’t want the money to be too easy to spend either. Put it in a place where you can’t transfer it to your checking account on a whim.”
Be prepared, and have a plan in place, and you’ll be able to get through whatever may come.
Maggie Germano (@MaggieGermano) is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit MaggieGermano.com.
Elizabeth McCourt, (@ecmccourt) JD, MFA, CPCC, ACC is the President of McCourt Leadership Group. She has been a financial services recruiter for 17 years and is also an executive coach, certified by the Coaches Training Institute (CTI), in addition to certifications in the Hogan Leadership Assessment and in Systemic Team Coaching. Prior, she was a trial lawyer in New Mexico with a JD from Loyola University and an undergraduate degree in Finance from the University of Maryland.
Alayna Pehrson is a Digital Marketing Strategist and Credit Repair Specialist at BestCompany.com (@BestCompanyUSA).
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.