Emergency Expenses That Affect Credit Health

Emergency expenses are the Achilles heel of credit health. A strong budget and financial stance can quickly dissolve without contingency plan, leading to overdue payments, collections, charge offs, bankruptcy and inevitable credit damage. According to a survey conducted by Statista, a data collection firm specializing in statistical analysis and business studies, the majority of Americans are concerned about the same factors that could lead to credit damage. These include:

1. Living expenses. The cost of living is more complicated than rising inflation. Its escalation can also manifest in the form of:
   • Increased rent. While your landlord cannot raise your rent during the term of your lease, most states’ laws don’t limit increases after the lease ends. For example, suppose you live in a two-bedroom apartment in Chicago’s Edgewater neighborhood. The area has grown and your landlord plans to raise your rent by $250 per month at the end of the lease. Although you cannot afford the increase, you also can’t afford the cost of moving. The result is lost wages, relying on credit to remain in your home (or to move), and eventually landing in unmanageable debt.
   • Car trouble. Auto repairs can drastically deplete savings and land you in serious financial trouble. Something as simple as a broken windshield or as complicated as a severed serpentine belt can cost hundreds or even thousands of dollars.
   • Fuel prices. Oil costs are subject to market fluctuation. We’ve all seen gas prices approach the $4.00 mark with little-to-no warning, and the budget effects are just as surprising.
   • Food costs. Historically, food prices rise an average of 2.5 percent each year. While this figure corresponds to inflation, it’s not much comfort when your wages fail to increase as well.
2. Education costs. Education is a valuable tool, but the price of attendance is out of reach for the average family. While this may not seem like an emergency cost, the aftermath of student loans can yield significant credit damage. Failing to repay education debt could mean seven years of consequences, court proceedings and garnished wages. In addition, student loans are not dischargeable in bankruptcy. Whether you are still paying off a personal student loan or wondering how to support your child’s future, it’s important to understand your options. Download our free e-book, a Student’s Guide to Credit, for more information.
3. Missed work/unemployment. Layoffs, injury and family needs are just a few of the ways you could find yourself without an income this year. While this may not be the cheeriest thought, it is currently reality for 5.5 percent of the American workforce.
4. Losing money on investments. Investments represent long-term planning and hope for the future. Losing money on a lousy real estate deal or a fluctuating stock market is more than unfortunate; it’s catastrophic for families and retirees who depend on these sources for valuable income. Unfortunately, forecasting these events is sometimes impossible for even the most seasoned financial planner, and the result can leave you vulnerable for months or even years.
5. Paying off debt. Unpaid medical bills and credit card balances can escalate out of control thanks to accruing interest. While the initial balance may not seem overwhelming, a year of minimum-only payments is a catalyst for credit damage.

The bottom line: Credit health isn’t a controlled process, and the average emergency doesn’t occur overnight. What was once manageable can become serious without foresight and careful planning. Protect yourself by establishing an emergency savings fund and working with a professional to minimize personal risk.

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