At first, it might seem like a bad idea to use a credit card to pay for a big-ticket item. And in some cases, it is. But there are some circumstances where you can benefit from whipping out your plastic when you need to make a major purchase.
Whether to use your credit card or not depends on a number of factors:
Advantages of using your credit card
If you don’t plan to carry a big balance on your credit card, then you can actually reap a few benefits. The key is to avoid paying interest on your purchase.
Earning rewards. You can clean up in the rewards department when you use a rewards credit card for a major purchase. Just remember that if you carry a balance and pay interest, you could negate the benefit of any rewards you earn.
Adding more consumer protections. Depending on the card you use, you might receive additional benefits, such as extended warranties, price protection, or the ability to dispute the charge if your product is defective.
If anything goes wrong with your purchase, it’s nice to have some backup protection. However, be sure to read the disclosure statements for your credit card very carefully so you understand any consumer protections you have.
Getting an interest-free loan. This strategy can be tricky, but you can do it by signing up for a credit card that offers a 0 percent introductory APR on purchases. Right now, these offers range from 12 to 18 months. During the intro period, you’ll make monthly payments without paying interest.
However, you must pay the balance off by the time the intro period ends. If you don’t, you’ll start paying interest on the balance—at the go-to APR.
Disadvantages of using your credit card
While there are some enticing pluses to using a credit card, there can also be some drawbacks. This is especially true if you need to carry a balance for a long time. Using your credit card to get the rewards or the added protections is quite different from using your card to finance a purchase over the next two years.
Paying more for your purchase due to interest. If you can’t pay off the balance quickly, you could end up paying a lot more for your purchase than you ever planned. Compound interest on a large amount grows quickly.
Often, stores will offer financing, but if it’s through their own credit cards, the interest could be 25 percent or more. Do your research and consider how long it will take you to pay off the purchase before you go with this option.
Impacting your credit score. You have something called a credit utilization ratio, which is the amount of credit you’re using compared to the amount of credit you have available. For instance, if you have a credit card with a $4,000 limit and your balance is $1,000, then you have a 25 percent ratio (1,000/4,000 = .25 or 25 percent).
If you put a $2,000 refrigerator on that same credit card, then your ratio jumps up to 75 percent (3,000/4,000 = .75, or 75 percent). Creditors prefer to see a lower ratio. Ideally, you’ll use less than 35 percent of the total credit limit on any account.
Alternatives to a credit card
Even if you’re in a situation where you simply can’t afford a big item that you desperately need, you still may want to think twice about using a credit card. Here are some other options you can consider:
Look into personal loans. Shop around for rates on a personal loan. Right now, rates range from about 6 percent to around 40 percent for people with poor credit. Weigh your options and find out if you have a credit card with a better interest rate than you can get with a personal loan.
Use your emergency fund. You might hesitate to do this, but situations like these are why you have an emergency fund in the first place. If the big-ticket item you’re considering is a pool table, then you probably shouldn’t raid your fund. But if you need a new refrigerator, then using your fund might be a good option.
If you have both an emergency fund and a rewards card, here’s an idea: Purchase the item with your rewards card and then use your emergency fund to pay off the balance by the due date. This way, you pay for the item, but you don’t have to pay interest. Plus, you’ll get miles or cash back if you use a rewards card.
Beverly Harzog is a nationally recognized credit card expert, consumer advocate, and the author of Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She runs a popular credit card blog on her website, www.BeverlyHarzog.com.
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