Managing unexpected expenses while having poor credit

Quick insights

• If you face unexpected expenses but have a poor credit score, there may be options available to help manage your situation.
• Having an emergency savings fund can be useful to maintaining your financial wellness.
• You may improve your credit score by adopting healthy financial habits.

Life is unpredictable and you may face large expenses you weren’t expecting, from medical bills to emergency home repairs. And when you’re already struggling with poor credit, you may be wondering how you can cover these unexpected costs. Let’s review your options below.

What to do if you have an emergency expense but have bad credit

Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is "bad credit." While there is technically no definition of a "bad" credit score, in this article the term "bad credit" refers to low credit scores. 

When you have to pay for an emergency expense but are already in debt and have poor credit, it can be a little overwhelming to figure out your next steps. To help you through this process, consider the following tips:

• Assess the severity of the emergency. Is this something that needs to be paid immediately, or can you pay it over time? For example, some medical expenses may be eligible for payment plans. Even if it’s not advertised, it can be worth asking your biller if you can pay in installments.
• Discuss your situation with your financial advisor. If you don’t have one, consider seeking one out, as they can help you work through your financial situation and come up with a plan.
• Explore financial assistance programs. You may qualify for government programs or be able to raise funds through a fundraiser in your community.
• Work with your lender. You may be able to negotiate payment plans or deferred payments with creditors to free up funds for the emergency expenses.

Types of unexpected expenses

Unexpected or emergency expenses may include, but are not limited to:

• Medical emergencies: Sudden illnesses or accidents that require immediate medical attention and/or potential ongoing treatment. For example, emergency room visits and follow-up care at physical therapy appointments.
• Home repairs: Your home may face issues like a leaking roof, broken heating system or plumbing problems that need quick fixes to prevent further consequences.

• Auto repairs: If you’re reliant on your vehicle and don’t have much access to public transportation, a vehicle breakdown or accident can disrupt daily commuting and require immediate financial attention.

Using your emergency funds

After determining which type of emergency expense you have, you may be wondering if you should dip into your emergency funds or savings account to cover this cost.

You should consider a few factors when weighing how to pay. First, think about the cost of using a credit card vs. dipping into your savings account. Credit cards come with interest rates and can potentially cause you to accumulate more debt in the long run (if you don’t pay your statement balance in full every month). Is your emergency something that needs to be paid now, or can you delay the payments or come up with a payment plan, such as with a medical expense?

Next, think about the importance of maintaining your current savings. If you use up your savings for this expense, you may no longer have access to an additional buffer should another unexpected expense arise. So, if possible, you may want to consider alternative options, such as financial assistance through government programs or borrowing money from trusted loved ones.

Finally, you can use your savings to help offset the cost of the expense. Afterall, that’s what your emergency savings fund is built for. It might be a good idea to find a healthy balance between using your savings as well as other methods—such as payment plans—to help mitigate the potential damage this could cause to your financial wellness.

Preparing for unexpected expenses in the future

If it’s feasible, try to put a little bit of your income towards an emergency savings account. Typically, you want to shoot for building and maintaining funds that can cover about 3-6 months of your living expenses (think: rent or mortgage payments, groceries, medical expenses and utilities).

While this number may sound large, a small contribution into a savings account each week can build up to a significant amount over time. Look for ways you can cut or save your money, such as by temporarily freezing subscription services. You could also set up an automatic savings plan through your bank where a set amount of funds is transferred to your savings account each week.

Finally, you may want to consider investing in an insurance plan now before anything unexpected happens to help cover some of the financial costs that arise from unplanned events and emergencies. For example, if you have a car, you may want to pay for auto insurance in case you get into an accident, this way you could have some of your medical and/or auto expenses covered. Be sure to read the insurance policy and terms before signing up and evaluate the option that would be most suitable for you.

Helping improve credit score

When you have poor credit, you may not be eligible for certain interest rates or get approved for loans to help cover the costs of sudden expenses. That’s why improving your credit score before the next unforeseen event can be helpful. Some tips to help improve your credit score include but are not limited to:

• Make your payments on time.
• Lower (and maintain) your credit utilization ratio to about 30% or less.
• Create a realistic budget that you can consistently follow to avoid overspending.
• Focus on repaying outstanding debts.
• Regularly review your credit score to monitor changes and make adjustments where needed.
• If you don’t already have an emergency fund, consider starting one now so you can be prepared for unexpected costs that life may throw at you.

Bottom line

When sudden expenses arise due to accidents, home repairs or other emergencies, it’s helpful to be prepared by having emergency savings and a good credit score. This could make a difference in how much added cost you could face in interest rates and additional fees.