Credit cards, when used wisely, can help your overall financial health. Of course, misuse of credit cards can get consumers into financial trouble.
Is It Okay to Use Credit Cards to Fund Large Purchases?
The answer to this question is: it depends.
There are situations where it is wise to charge a large purchase on a credit card.
First, you want to avoid paying interest on your large purchase. As long as you do not plan to carry a large balance forward on your credit card, then using plastic is okay.
Second, when using your credit card will offer benefits you wouldn’t otherwise receive, then using your card may be a wise choice.
- Credit Card Rewards: It is wise to put a large purchase (that you will pay off, in-full when the bill arrives) on a credit card that will earn you rewards. Credit card reward programs offer cash back, points to receive gift certificates, miles for free airfare, and other perks depending on the terms of your credit card rewards program.
- Consumer Protections: It is wise to put a major purchase (again, that you will pay off when the bill arrives) on a credit card when that card offers additional consumer protections, such as price protection, extended warranties, the right to dispute charges for defective products, or other protections. Contact your credit card company to learn about the consumer protections available to you when using your card.
- Interest-free Charges: If you time a large purchase on your credit card right you can essentially get an interest-free loan for nearly two months. This strategy typically does not work if you are carrying a balance month after month on your credit card. If you make the large purchase right after your new billing cycle begins, that charge will not appear until next month’s bill. By the time next month’s bill is due, so long as you pay it in full, you basically are able to make a large purchase interest free for nearly two months.
There are situations when it is not wise to charge a large purchase on a credit card. If you cannot afford to pay the balance off in full (or quickly over a few months), then you could end up paying a lot more for your purchase in interest charges. Compounded interest on a large amount will add up quickly.
Also, carrying a large balance on your credit card will negatively affect your credit score. The amount of credit you are using (amount of debt) compared to the amount of open credit you have available is called your “credit utilization ratio,” and it factors into your credit score. High balances compared to the amount of open credit is harmful to your credit score.
It is always a good time to make wise financial choices, especially when it comes to using credit cards!
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