It can sometimes be confusing to know whether you should be using a credit card for large purchases. The answer to this is that it can depend on a number of factors. Typically, if you plan to pay off the full balance by its due date then using credit is a good idea, especially as this will contribute towards a positive credit score, and possibly even cashback.
However, if you are only able to pay off the purchase over a lengthier period of time then you will be charged credit card interest, which is typically quite high.
This article will outline the best instances where you should use a credit card for large purchases, and when to avoid doing so.
What are the Benefits of Using a Credit Card for Large Purchases?
Many credit card providers will provide their customers with a sign-up bonus, usually in the form of cash back, points or air miles.
In order for a consumer to earn their sign-up bonus, they typically need to spend a certain amount within the first few months of having the credit card. As such, if they already need to make a big purchase, this may be a great time to make use of their credit card and earn their bonus at the same time.
Earn Rewards While Spending
For those who are able to pay back their large purchase in a short period of time, then it may be worth using their credit card to pay for this. This is because some credit card providers allow their customers to earn valuable rewards when spending.
0 Percent Intro APR
Some credit cards may have a 0 Percent Intro APR period, which may incline customers to want to use them for a large purchase.
These customers will still be required to make minimum payments every month at the promotional rate. This means that they will avoid paying the regular interest rate, which they would have had to pay if they had taken out a loan to pay for the large purchase.
Credit Card Holder Benefits
One of the greatest perks of having a credit card is the additional protections and benefits that come with it, including extended warranties on certain purchases, purchase protection and sometimes even travel insurance.
For existing credit card holders, it is always worth keeping a lookout for any perks. For instance, if you are considering using a credit card to make a big purchase for a household appliance, the purchase may include additional years of warranty coverage – increasing your protection as a consumer.
In Case of Emergency
In certain instances, you may need funds to cover immediate expenses. Using a credit card for this may be the fastest or possibly only option.
What are Common Large Purchases Bought with a Credit Card?
Some common large purchases bought using a credit card include the following:
- Grocery Shopping
Food shopping trips can add up quickly, especially for those with larger households. This is a common expense, typically weekly or monthly. As such, in order to benefit from this regular spending, customers should make sure to pay with a credit card to save money as well as earn rewards.
- Large Appliances / Electronics
A number of credit card providers will provide additional protections and benefits that can be very helpful when you are upgrading household appliances.
For instance, purchase protection will apply to large purchases made using your credit card for a specific period of time – typically between 90 to 120 days. If the purchase is damaged or stolen, you are likely to be eligible for reimbursement or a replacement if you used a credit card to make the purchase.
Travel expenses are a great way to earn rewards while using a credit card. However, you should always ensure that you are able to pay off the expenses in full when making the purchase.
Depending on what kind of regards your credit card provider offers, then customers may have further access to added travel protections such as trip cancellation insurance and luggage protection.
When Should You Not Use a Credit Card for Large Purchases?
A customer should never use a credit card if they cannot pay off the full balance at the time of the due date. The following will outline a number of situations where you would be better off following down another alternative to a credit card to make a large purchase:
- Unexpected Medical Bills
Using your credit card for large purchases without a repayment plan or the resources and funds to pay it off may leave you in a spiralling financial situation in the long run.
It may be the only option in the case of emergencies, but it is always worth consulting a credit counselor prior before pursuing this route if possible.
- Using it Just for the Sign-up Bonus or Rewards
If you cannot afford a large purchase, then using a credit card is never a good idea – especially if you are doing so just so you can receive the sign-up bonus or rewards.
Any rewards that you may receive will quickly be overtaken by excessive interest rates if you cannot clear the balance off in full. The rewards will quite simply never exceed the value of the interest that will rack up.
How can I Plan for Making a Large Purchase Using a Credit Card?
If you think that you are going to make a large purchase soon, then it is definitely worth first checking the length of time it will take you to realistically pay it off in full without running the risk of interest rate charges increasing.
For those with 0 APR Intro Periods, if they are unable to repay the balance within the promotional interest-free period, then it is certainly best to avoid making the big purchase using that credit card.
What are Some Alternatives to Credit Cards to Use for Large Purchases?
It is important to remember that credit cards are not the only option for making large purchases. In fact, it is often worth considering the following alternatives prior to pursuing this route:
- Using Your Savings
This is the best way to pay for a large purchase while steering clear of falling into any debt problems.
General financial advice is that you should have enough in your savings to cover at least three to six months’ worth of expenses in an emergency. As such, if using your savings to pay for a large purchase will take you to significantly lower than this amount then it is probably not worth the risk of pursuing this option.
- Paying Through an Installment Plan
Many retailers now offer payment installment plans, especially for when you are wanting to make a large purchase.
- Apply for a Personal Loan
In some instances, you may be able to qualify for a personal loan offer with a lower interest rate than offered by your credit card provider.