29

I am planning to make a big purchase. I have the money in savings to cover it, but I don't want to drop $2500 all at once if I can avoid it.

I have a credit card with a $9000 limit, but I know that going over 10% threshold can hurt credit.

Credit cards also have higher APR and interest, so it seems like getting a loan could be a smart way to make a big purchase and still keep a buffer of cash and build up credit.

Basically, my goal is not to lose $2500 all at once, unless it's going to save me more money in the long run, but I would like to at least get a credit rating boost from this big purchase, if possible.

  • 5
    Do you usually carry a balance and pay interest on your credit card, or do you pay it in full each month? – Ben Miller May 2 '16 at 14:35
  • 7
    Does your credit card offer rewards of any kind? or additional protections(like extended warranty)? – Bishop May 2 '16 at 16:44
  • 18
    Get a 0% for X months (usually 12 to 18) card, put the purchase on that, make minimum payments and pay off the remaining balance the month before the 0% ends. If you can also get signup or cashback rewards, as MonkeyZeus suggests in his answer, that's gravy :-) – jamesqf May 2 '16 at 17:22
  • 14
    Borrowing money from anyone official (bank or CC company) is always going to cost you more money. Always. Despite, our economic system encouraging you to always be in debt, I personally live by "neither a borrower nor lender be" as a general rule of life. Given that, I'll buy items like this on my CC then pay off right away so that I get the points for it, but am not in debt. – coblr May 2 '16 at 20:36
  • 9
    Pay cash if you can. If you can't, then wait and save up until you can. Don't buy stuff you cannot afford. – Mason Wheeler May 3 '16 at 1:06
75

I would not be concerned about the impact to your credit rating. You already have an excellent credit score, and the temporary change to your utilization will have minimal impact to your score.

If you really need to make this $2500 purchase and you have the money in the bank to pay for it, I would not recommend borrowing this money. Only put it on the credit card if you plan on paying it off in full without paying interest.

Let me ask you this: Why do you want to keep this $2500 in the bank? It certainly isn't earning you anything significant. My guess is that you'd like to keep it there for an emergency. Well, is this $2500 purchase an emergency? If it is necessary, then spend the money. If not, then save up the money until you have enough to make the purchase. It doesn't make sense to keep money for an emergency in the bank, but then when one comes up, to leave the money in the bank and pay interest on your emergency purchase.

If you make this emergency purchase and another emergency comes up, you can always (if necessary) borrow the money at that time. It doesn't make sense to borrow money before you need it.

That having been said, I would encourage you to build up your emergency fund so that you have enough money in there to handle things like this without completely depleting your savings account. 3 to 6 months of expenses is the general recommendation for your emergency fund. Then if something unplanned comes up, you'll have the money in the bank without having to borrow and pay interest.

  • 3
    It's possible that the line of credit that he has will be closed or cancelled when he needs it. Economic downturns have been correlated with a tightening of credit. – Bishop May 2 '16 at 16:42
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    @Bishop Yes, that is possible, which is why I recommended building up an emergency fund. Carrying a balance on your credit card at high interest just so you can keep a cushion in your savings account is a losing proposition. – Ben Miller May 2 '16 at 16:46
  • 1
    I agree. I just meant it as a caveat to your statement: "... [Y]ou can always borrow the money at that time" – Bishop May 2 '16 at 16:49
  • Not only that, but if credit gets tightened, the credit card company may very well want their money back. – a CVn May 3 '16 at 12:57
  • 3 to 6 months of expenses is a good amount to have in liquid assets. One to two years is a good goal to store as a combination of necessary supplies and assets that can be reliably liquidated within 3 to 6 months. You never know when you might lose an arm and have to be retrained for a different job... – Perkins May 5 '16 at 0:37
22

It is going to save you more money in the long run to pay at once with cash. If you take out a loan, you will pay interest on the balance, costing you money.

If you pay off the balance immediately, there is no difference between the options and your question becomes irrelevant.

There is no credit rating benefit to placing large purchases on your cards, especially since your credit is fine.

My advice is to pay in cash in this case, mostly because it makes you 'feel' the purchase. This is what you are describing in your question. This instinct helps you recognize potential problems, instead of masking them with debt. Questions like:

"Do I need this?"

"Am I overextending myself financially with this purchase?"

"Am I holding enough cash-on-hand for emergencies?"

You may be fine in these areas, but I would still argue that cash makes you a better buyer because the expense feels much more significant, making you more cautious and discerning.

You are right to feel these things before dropping a large sum of money. Let it inform you and help you make better decisions. Don't mask it or be paralyzed by it!

  • 2
    By "with cash", do you mean literally with cash, or with a credit card? Throwing away $2500 in rewards seems like a poor choice. – JHZ May 4 '16 at 17:37
  • @JHZ I think you mean the rewards on $2500, but yes I do mean literally. :) If the OP wants to pay on his card and then payoff immediately for the rewards, that would be equivalent in this context. Will the OP's financial situation be changed by $25-$75 in rewards? Probably not, but it is nice. On the flip side, why does the CC company offer the reward? Because statistically there is a high chance of NOT paying down a large balance immediately, and your gains evaporate. IMO, either way is OK if your finances are stable, but do not ignore the risk. – jkuz May 4 '16 at 17:59
  • @jkuz "why does the CC company offer the reward?" The CC company offers the reward because they are competing for your business with other credit card companies. Credit card companies charge the stores when they are used. Generally 3%. So if the CC makes %3 on your purchase and the give you back 2%, they make money, even if you don't carry an interest. OTOH, if they gave nothing back or one of their competitors offer more rewards, you'd just use cash or the competitor and they wouldn't make anything. – Shane May 4 '16 at 20:28
  • @Shane Yes, good point. That is another reason. But it is still true that the risk of lapsing on a payment is what the CC company is counting on for significant returns. Like I said before, either way is OK. – jkuz May 4 '16 at 21:16
19

I would recommend putting it on a credit card, just not your current credit card.

Run a Google search for "credit cards with good signup bonuses" and you will potentially come across these links:

http://www.cardrates.com/advice/11-best-signup-bonus-credit-cards/

https://www.nerdwallet.com/blog/top-credit-cards/best-credit-card-offers/

There are cards out there which can qualify you to:

  • Earn a $150 Bonus after you spend $500 on purchases in your first 3 months from account opening
  • Unlimited 1% cash back on all other purchases

The $150 back on a $500 purchase is an instant 30% ROI. The best stock options couldn't guarantee you that kind of return.

You will instantly meet the criteria and get $150 + $25 (1% cash back on the full $2,500)

The only stipulation is that in order to fully benefit from the rewards, you must pay off the card in full when your bill comes in or else you will pay steep interest. After a year or so you can cancel the card.

If you want, sign up for two or three cards and split the payment. Reap the rewards from multiple credit cards. I wish I had done this with my college tuition; it was a tough pill to swallow when I forked over $3,000 at the registrar's office for one semester :-(

I had the potential to realize a savings of $900 in one semester alone. Would have been nice to apply such a kickback against buying my books.

If you work things out correctly then you can save 30% ($750) on your total purchase. That's one way to not run yourself dry.


Disclaimer:

By following these steps you will be triggering at least one hard inquiry against your credit. Each hard inquiry has the potential to lower your credit rating. If you do not plan to use your score to apply for any major loans (e.g. car or house) then this reduction in credit will have basically no impact on your day-to-day life. Assuming you continue using your credit responsibly then your credit should just bounce right back to where it was in no time.

I know there are many people out there that cherish their score and relish in the fact that it is so high but it's for moments like these that make it worthwhile to "spend" your credit score. It's an inanimate number whose sole purpose is to be "spent" in times like these.

  • Why the downvote? – MonkeyZeus May 2 '16 at 16:20
  • Just remember that asking for a new credit card will give you a hard inquiry, which may harm your credit score (I didn't downvote) – fpg1503 May 2 '16 at 18:39
  • 2
    @fpg1503 Definitely! Hopefully I addressed that in my third-to-last paragraph. Should I put more emphasis on it for future readers? – MonkeyZeus May 2 '16 at 19:42
  • I'd say so, I missed it when reading, my bad :) – fpg1503 May 2 '16 at 19:44
  • 2
    @fpg1503 No sweat bud, check out the edit :) – MonkeyZeus May 2 '16 at 19:56
9

You want to know if you should pay cash or use a credit card like cash? There are so many benefits to the card, like purchase protection, cash back, and postponed payments, that there needs to be a really good reason to pay cash.

If you are concerned about the 10% threshold, ask your credit card company to raise your limit.

If you are indifferent, let the merchant decide for you by asking for a discount if you pay cash.

The biggest reason is that credit cards, when handled shrewdly, make your money work for you by keeping it in less liquid / higher interest investments like inflation-adjusted T-bills. You will still be able to access it by using the credit card to float large expenses without liquidating at a loss. Investment Accounts like Schwab One are great for this since you can "borrow" cash at a low interest rate against your securities, until your security sale clears.

  • 1
    It's worth noting that the 10% threshold doesn't matter if you simply make a payment before the statement closing date (which is generally the balance reported to the credit agencies.) – reirab May 2 '16 at 21:28
  • +1, especially to ask the retailer for a discount, but I'm not wild about "borrow cash against your securities" – Xen2050 May 3 '16 at 0:53
8

There are a couple of things to consider here that are relevant to your situation:

  1. Remember that your credit score does not matter at all until you need to use it. If you decided to put the 2500 on your CC and even if your credit score took a big hit because of that (though I doubt it would), when it comes time to make another purchase where your credit score is needed, you could choose to pay off the CC debt about 30 days before, and your credit score will jump right back up to where it was previously. So, in general, don't worry about your score unless you believe your score will be checked in the near future.
  2. Even if you decide to pay from your savings, I assume you get some sort of points/cash back on your CC so you should consider putting it on your CC regardless. Then the question becomes how much should you pay it down? (The answer is somewhere between the minimum payment and pay it in full to avoid interest.)
  3. What is the interest rate on your CC? Surely it will be much higher than the interest you earn on your savings, so you should start with the assumption that you will pay off the CC in full to avoid interest charges. So now the question is: "Is there any reason to choose to pay interest on money I don't need?"
  4. Let's explore some reasons you would choose to pay interest on money you don't need. The most common reasons are liquidity (having money immediately available when a better investment comes along) and emergency (surprise medical bill, bailing your mom out of jail, etc). The reality is, pretty much any emergency that can come up will not require you to have cash in your hand within hours. So that means you could use the CC to pay for the emergency and in the rare instances where you do need cash, you could do a cash advance on the CC to get the money. So, in general, when trying to decide between dipping into your low-interest savings vs keeping money on the higher interest CC, save yourself in the interest and use your savings. However, this assumes that it really is savings and not your normal living expenses. (Don't spend your rent money today to avoid paying interest. In that case you probably shouldn't be making the big purchase to begin with.)
  5. Regarding the loan option. I probably wouldn't do a conventional loan for this, because similar to the CC you would be paying interest for money you don't need today. However, you may be able to find a 0% intro APR with no fees that would enable you to finance your purchase over 12 months for free, or 18 months for a 1-2% fee. Now your big purchase takes a small nibble out of your savings per month rather than a big bite all at once.
2

Some already mentioned that you could pay with your savings and use the credit card as an emergency buffer. However, if you think there is a reasonable chance that your creditcard gets revoked and that you need cash quickly, here is a simple alternative:

  1. Put some money on your creditcard, but hold back a small buffer (say 500)
  2. Buy the item with your creditcard, now you will have less than 10% drawn
  3. Before interest kicks in (but after the next paycheck?!) pay back the remaining 500 that is open on your creditcard.
1

From an Indian perspective, this is what I would do.

  1. Purchase it by credit card usually right after the monthly billing cycle. This would give me around 50 odd days of credit.
  2. Using credit card would entitle me for the loyalty points that are typically available on the spends. Mine is linked with an airline and I would earn miles on it which can be redeemed at latter stage.
  3. Most important part, pay in full once you receive you monthly credit card statement to avoid any interest at all.

This typically would not only keep your credit score healthy but also give you additional benefits on spends.

protected by Chris W. Rea Sep 1 '16 at 12:50

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