In an ideal world, we should all have a rainy-day pot of cash to raid in case an emergency strikes. At least three months’ worth of income in an easy-access savings account should suffice.
However, when savings are depleted and money is suddenly needed, it’s easy to see that a lot of people use expensive payday loans simply because they need money fast.
Many credit cards offer far better borrowing rates – the Tesco Clubcard Credit Card offers 16 months of spending interest free – but as applications can take up to three months to get approved, they’re not the best option when your oven or boiler has suddenly given up and you need to cough-up pronto for its replacement.
Obviously no one knows when these unexpected events are going to crop-up, but rather than leaving a payday loan as your only option, you can plan ahead and stash away a low-rate credit card, ‘just in case’ you end up with an unforeseen spending situation on your hands.
You can take out a card ahead of time and leave it in a drawer or safe until needed (if at all). That way you’ll always have access to an extra bit of cash if needed and you know you’re not getting stung because you need the money quickly.
Unlike payday loans you also get a small amount of time, typically a month, before your next statement to pay off a credit card balance and avoid any interest charges at all.
But if you need longer to pay back the money, a ‘just-in-case’ card with the lowest long-term interest rate possible will mean that you don’t pay over the odds on your debt. Look past enticing opening deals, which usually have costly charges after the introduction period expires, and focus on the representative Annual Percentage Rate (APR).
These cards are generally a cheaper option than going into the red on your current account as well. The average interest rate on an overdraft is now 19.65%, according to Bank of England data, and you’re charged interest straight away.
Personal finance expert Andrew Hagger of Moneycomms said: “An emergency credit card can be a god send if your car breaks down or the boiler or washing machine packs up, as it enables you to get things back to normal straight away while buying you a bit of time to consider how you'll eventually pay for the repairs.
“Even if it takes you two or three months to clear the card balance it's not going to cost you a fortune in interest charges if you have a low rate card - A £2,000 balance at 6.9% APR for three months for example, works out at a cost of just under £35.”
Here are three of the best credit cards to have tucked away
1. Sainsbury’s Low Rate Credit Card
With an APR of 7.8% (variable), this card has the lowest annual interest rate on the market. Therefore, if you do have to use it for spending, it could save you hundreds of pounds in charges compared with a payday loan.
For instance, if you use the card to spend £400 and took six months to pay it off (with average monthly payments of £68) you would pay £8 in interest overall.
On the other hand, if you borrow £400 from payday lender Wonga you would pay back £145.48 in interest after just 35 days. If you didn’t pay back the money during this time you would pay even more.
2. Barclaycard Platinum Simplicity
This credit card has an APR of 7.9% (variable), the lowest on the market after the Sainsbury’s card mentioned above. Again, you could save a considerable amount in interest charges by using this card for emergency spending over a payday loan.
However, it comes with a few stipulations: You must be at least 21 years old, have a good credit rating and have an annual income of at least £20,000 to qualify for the deal. You also can’t apply for this card if you already have a credit card with Barclaycard.
3. NatWest / RBS Low Rate Credit Card
The NatWest or RBS Low Rate credit card has a relatively low APR of 9.9% (variable). Both cards also offer 0% interest on spending for the first six months after opening. The cards also offer a low rate of 2.2% on balance transfers for 12 months, if you also want a card that is suitable for paying off debt from elsewhere.
As with the Barclaycard Platinum Simplicity, you need to have a good credit rating to take out either of these cards and both are only available online.