Buying Big Ticket Items? Think Before You “Charge” It
The next time you make a large purchase – whether it's a new appliance, sectional sofa, or other costly item – don't automatically reach for your credit card . Instead, stop to consider whether you'll be able to pay the full balance immediately or whether you'll have to chip away at the total month after month. If you have the funds, go ahead and swipe your card; if not, think twice about your decision to use plastic.
Carrying a high revolving credit card balance, with an APR that usually averages 12-16%, can add significantly to the purchase price of high ticket items. 1 If you buy a $2,000 item using a card with a 15% APR, and pay only $40 per month, you'll wind up taking 79 months (more than 6 years) to pay off your balance and spend more than $1,150 in interest. The financing adds 50% to the original purchase price. 2
There's another reason to avoid carrying that large balance: it may lower your credit score. Approximately one-third of your score is determined by the percentage of available credit you're using. The higher the percentage, the more your credit score could suffer and lenders could view you as a risky borrower.
On the other hand, charging a large purchase and paying the balance immediately can be a very smart use of credit, especially when a card offers cash back, mileage rewards, purchase and price protection and extended warranties. 3 Even if you think you know what benefits a card offers, it's wise to call the issuer for confirmation. In some cases, rewards, protections and warranties may be limited to a company's high-end cards or apply only to expenditures below a specific dollar amount.
Another of the smartest ways to pay for big ticket items is the traditional way: in cash, using a check or debit card . If the purchase is planned, you have the opportunity to accumulate the total in advance by allocating a portion of your budget to this savings goal. If the purchase is unplanned – the refrigerator suddenly stops working or your transmission breaks – tap a liquid account you've earmarked for emergencies. Financial experts recommend everyone have emergency funds equal to three or six months of salary for this very purpose: to cover unexpected needs and situations without relying on costly credit.
If you have no choice but to carry a credit card balance, choose your lowest interest credit card and always pay at least the minimum balance by the due date; otherwise, you could be hit with penalty fees and a higher rate of interest. Late payments (more than 30 days) show up on your credit report for a full seven years. 4 And that's not going to help you build or repair credit.
1 http://www.creditcards.com/credit-card-news/interest-rate-report-100114-up-2121.php
2 Credit card repayment calculator from CreditKarma
3 http://www.bankrate.com/finance/credit-cards/purchase-protection-1.aspx
4 http://blog.equifax.com/credit/can-one-late-payment-affect-my-credit-score/
