You’re staring down a four-digit expense, and you have to pay for it somehow. Whether you need to replace your water heater, buy a new car engine or cover an unexpected emergency, a credit card can be helpful when you’re short on cash. But should you use your credit card for big purchases?
Should You Use a Credit Card for Big Purchases?
There are times when using a credit card for a big purchase makes sense. It can buy you some time and improve your cash flow. But it may also impact your credit score and, if you’re not careful, lead to costly debt that’s difficult to repay. Here are some pros and cons to consider before swiping your card for a major purchase.
[Read: Best No-Annual-Fee Credit Cards.]
Pros of Using a Credit Card for a Big Purchase
Make Emergency Buys
If you don’t have the cash on hand to make a big purchase, a credit card can open that door for you. This may come in handy if it’s time-sensitive, like buying a new refrigerator or making repairs on your car so you can get to work. Convenience and speed are big reasons for carrying credit cards in the first place.
Improve Cash Flow
When you pay for a big purchase in cash, it could hurt your cash flow at the moment. You may have little in your bank account until your next paycheck. Using a credit card for a big purchase buys you some time until your credit card payment is due.
During that time, you might expect your biweekly check or be able to sell some items to get more cash on hand. As long as you pay off the balance in full by the due date, this can be an effective strategy to boost cash flow in the short term.
Earn Rewards
One of the major benefits of using a credit card for a big purchase is the potential for earning significant rewards. If you have a rewards credit card that earns miles or cash back, using this as your payment method can help you earn more for something you were already planning to buy.
The major purchase could get you enough miles or points to snag a reward flight or get you closer to earning one. Cash back credit cards can give you a nice return on your spending. If you have a 2% cash back credit card and make a $5,000 purchase, you’ll get $100 cash back.
Enjoy Benefits
Credit cards come with some unique protections that you don’t get if you pay with cash. The majority of credit cards have zero-fraud liability, which can help provide fraud protection. If there are any issues, you can also dispute a charge.
Some credit cards offer purchase protection for a period of time so if your item is damaged or stolen, you’re not completely out of luck. Others offer extended warranty protection, which protects your purchase for even longer.
If your major purchase was travel related, your credit card might offer travel insurance, cover baggage fees and delays, and include lounge access.
Meet a Spending Minimum for a Sign-up Bonus
Should you open a new rewards credit card before a big purchase? Maybe. The credit card market has a dizzying number of rewards credit cards. But if you’re planning to earn a sign-up bonus, you typically have to spend a certain amount of money within a particular time frame.
That might be difficult with your day-to-day expenses, depending on your budget. But a major purchase could get you over the threshold to access generous welcome bonuses.
[Read: Best Grocery Credit Cards.]
Cons of Using a Credit Card for a Big Purchase
Increase Credit Utilization
You might be able to reap some rewards by putting a big purchase on your credit card, but it could also impact your credit score. Credit utilization refers to the percentage of available credit that you’re currently using, and it’s an important factor in a category that makes up a substantial 30% of your FICO score.
When you put a large purchase on your credit card, you could be using up a significant amount of your credit. If your balance exceeds 30% of your credit limit, you have a high credit utilization ratio that may hurt your credit score.
There are ways to avoid this. “When you make a charge on a credit card, the balance that shows in your credit report is typically the balance on your billing statement,” says Rod Griffin, senior director of public education and advocacy at Experian. “If you then turn around, say the next day, and pay the balance in full, it may not be reported to the credit bureaus. The billing cycles typically last 30 to 45 days, and so if that billing cycle hasn’t ended and you paid the balance in full, it wouldn’t be reported to the credit bureaus.”
Incur Interest Charges
If you charge a big purchase and can’t pay off the credit card in full, you’ll probably rack up interest charges. Credit card annual percentage rates can be steep and can significantly increase your borrowing costs.
Consider the urgency of the purchase. “Is the purchase an emergency, such as replacing the tires on your car before winter, a leaking roof or an unreliable furnace? Or could I save for a while and make the purchase in cash without paying a significant amount in interest?” says Martin Lynch, president of the Financial Counseling Association of America.
Carrying a large balance on your credit card may result in hefty interest charges that can make paying off the credit card debt more challenging.
Incur Monthly Payments
Using a credit card to pay for a big purchase instead of raiding your checking or savings account can help your short-term cash flow. But it could potentially hurt your liquidity in the long term. When you’re taking on debt today, you’re agreeing to monthly payments in the future.
“I would look at what is the balance going to do to, first and foremost, to my ability to repay the debt. What does it do to my cash flow circumstance?” says Griffin.
Look at the percentage of your income that will go toward the monthly payments. Do you still have wiggle room in your budget or will it be a stretch?
Managing Your Credit Card Before a Big Purchase
You can choose a specific credit card that might work well for the purchase — for example, a rewards credit card that offers higher earning potential in a certain category. You could maximize your rewards if your big purchase falls into that category.
If you have solid credit, you can also open a 0% APR credit card to make a big purchase. These cards have an introductory period that can help you pay off the item in manageable chunks, interest-free.
“You need to make sure that if you do get a card with an introductory rate, you meet the terms of that introductory offer,” says Griffin. “But again, that comes with the caution that, if you don’t pay it off within that introductory period, you could be faced with substantial interest rates, potentially balloon payments, those sorts of things.”
[Read: Best 0% APR Credit Cards.]
Can You Overpay Your Credit Card Before a Major Purchase?
If you’ve reviewed the pros and cons of using a credit card for a big purchase and want to move forward, the first thing to do is to check your credit limit. Make sure you have enough to make the big purchase.
Some people want to take a different strategy and wonder if they can overpay their credit card before a big purchase.
“With many lenders, you actually can overpay your account in advance of a large purchase, which would temporarily give you the additional credit you might need to make the transaction,” says Lynch. “That wouldn’t increase your score, unfortunately, and it wouldn’t permanently increase your credit limit. It would also have to be permitted by your card provider’s policies.”
To head off an embarrassing credit denial, notify the card issuer before charging a big purchase. Many credit card companies have advanced technology to help prevent fraud. If expenses this size are not the norm for you, letting your credit card company know ahead of time can ensure there are no blocks on the purchase.
Lastly, consider other alternatives, such as a personal loan or home equity line of credit, that may be more cost effective. If you can hold off and save up for the big buy, that might be your best bet. Then you can confidently choose to pay with cash or use a credit card and earn rewards, knowing you can pay off the purchase.
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Should You Use a Credit Card for Large Purchases? originally appeared on usnews.com
