Are credit cards the right way to finance big purchases?
If you need to make a large purchase, the ideal way to pay for it is usually in cash. This way, you don’t have to worry about incurring future monthly payments to cover costs. And you won’t make your purchase more expensive by incurring interest charges.
If you don’t have the cash and the purchase is essential, you will need to consider other options, however. And, if that’s your case, the big question you might be asking yourself is whether a credit card should be considered one of those options.
When it doesn’t make sense to use a credit card to fund big ticket items
If you need to finance a large purchase, your goal should probably be to keep your total borrowing costs as low as possible while still making sure you can afford the monthly payments.
In many cases, a credit card is not the right option due to the high interest rate charged by the cards. If you end up paying interest at a high rate, your purchase will become much more expensive over time. This is especially true as credit cards tend to have low minimum payments despite their high rates. If you only pay the minimum, it could take you decades to pay off the full amount you borrowed. You could end up paying interest charges several times higher than the item’s original purchase price.
However, it would only be your fate if you ended up paying the high interest charges that are standard on most credit cards. In some cases, you can avoid this by purchasing a card that offers a 0% promotional interest rate. And, if that’s an option for you, a credit card may be the perfect choice to finance your expensive purchase.
You see, some card issuers offer to let you pay 0% interest on purchases for a period of time, say 12 to 15 months after you first became a cardholder. If you’re confident that you can pay off your big purchase within that time frame by making monthly payments that are within your budget, a credit card might actually allow you to finance your purchase without having to pay. all interest. It would probably be your only way to borrow interest-free and could make the card the more affordable option.
Of course, you need to be sure that you pay most or all of the purchase before the 0% rate expires. If you can’t, alternatives like a personal loan with a low fixed rate and a fixed payment schedule might be a better bet than a credit card. Personal loans won’t offer you a 0% rate, but they charge less interest than a standard card. You’ll know right off the bat exactly what your monthly payments would be, total borrowing costs, and debt-free date.
Ultimately, you will have to think through the details of any type of debt you incur. Don’t discount credit cards just because of their reputation for high rates. You can make them work for you by finding the right 0% interest card and paying off the balance owed before the promotional rate ends.