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Is Credit Card The Right Way To Finance Big Purchases?

Credit Card for Big Purchases


By Christy Bieber, The Motley Fool

If you need to make a big purchase, the ideal way to pay for it is usually with cash. That way, you don't have to worry about committing future monthly payments to covering the 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, though, you'll need to look into other options. And, if that's your situation, the big question you may have is whether a credit card should be considered one of those options.



When using a credit card doesn't make sense to finance costly items

If you have to finance a big purchase, your goal should likely be to keep your total borrowing costs as low as possible while making sure you can afford the monthly payments.

In many cases, a credit card isn't the right option because of the high interest rate that cards charge. If you end up paying interest at a high rate, your purchase will become much more expensive over time. That's especially true since credit cards tend to have low minimum payments despite their high rate. If you pay only the minimums, it could take you decades to pay off the full amount you've borrowed. You could end up paying interest costs that are many times more expensive than the initial purchase price of the item.

However, this would be your fate only if you ended up paying the high interest charges that are standard on most credit cards. In some cases, you can avoid this by opting for a card offering a 0% promotional interest rate. And, if that's an option for you, a credit card may be the ideal choice for financing your costly purchase.



Take advantage of low promotional interest rates

See, some card issuers offer to let you pay 0% interest on purchases for a period of time, such as 12 to 15 months after you first become a cardmember. If you're confident you'll be able to pay off your large purchase within that time by making monthly payments that fit into your budget, a credit card could actually allow you to finance your purchase without owing any interest. This would likely be your only way to borrow with no interest and could make the card the single most affordable option.

Of course, you do need to be confident you'll pay off most or all of the purchase before the 0% rate expires. If you can't do that, alternatives such as a personal loan with a low fixed rate and a set payment schedule could be a better bet than a credit card. Personal loans won't offer you a 0% rate, but they do charge less interest than a standard card would. You'll know up front exactly what your monthly payments, total borrowing costs, and debt-free date would be.

Ultimately, you'll need to think about the details about any type of debt you're taking on. 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 due before the promotional rate comes to an end.

See more at The Motley Fool





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Finance Magazine: Is Credit Card The Right Way To Finance Big Purchases?
Is Credit Card The Right Way To Finance Big Purchases?
Should you consider a credit card because of the monthly payments and interest charges if you do not have cash and big purchases are essential?
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