Many of us post-divorce are confused when it comes to credit card use. The bigger question is usually, “When it is okay to use a credit card and when should I pay with cash or my debit card?”
To help you better understand when to whip out the plastic and when to leave it in your wallet, lets take a look at the pros and cons to using credit cards.
Factors to consider
Standing at the cash register deciding how to pay for your purchase whether it is a small bag of groceries or a new washing machine you have a choice; cash or credit.
When it comes to deciding how to pay there are several factors to consider.
- Your money style. To understand your money style, consider what’s important to you and “worth it” when it comes to spending money. For example: Do you prefer experiences over possessions? Do you define your status and self worth by how much money you have? By answering these questions you can better understand your money style.
- Type of purchase. Are you purchasing day-to-day essentials or a skiing trip to Aspen? The type of purchase you plan to make may determine whether you use cash or credit.
- Security Concerns. Let’s face it there are certain securities you just can’t get with cash; a larger purchase may be worth placing on credit.
Using Credit Responsibly
I am not against using credit cards if you are disciplined to use them responsibly. For example: I use a credit card for paying most of my monthly bills and pay the balance in full at the end of each month. I earn rewards on the card and I know it is a regular bill I have to pay, so it is already slated in my budget.
Using a credit card this way can be a risky move if you can’t pay the balance in full as interest and fees will build and you may end up in some serious debt.
If discipline is not your thing or credit is not available to you than cash is the way to go. This may be in the form of the paper stuff or your debit card. Either way you can’t spend more than you have.
Now the Big Ticket
If ever there was a time to use a credit card, purchasing a big ticket item is it! There are several reasons you may want to place a big ticket item on credit.
- You can dispute the charge if the item becomes defective.
- Purchases such as laptops, cameras, or other electronics are big ticket items many people purchase online. Paying with credit via the internet is often safer than paying with debit.
- If you dispute a purchase you made over the internet, you are protected by federal law which requires the credit issuer to dispute the matter with the retailer. You do not have to pay the charge (or interest) while the matter is under dispute.
Save, Charge, Pay
If you are in need of a big ticket item the best way to prepare for your purchase is to start saving! Create a line item in your monthly budget for the item and save until you have enough to pay for it. Then you can purchase the item on credit, obtain the security and protections a credit card provides, and pay it off when the bill comes. There’s an excellent calculator to help you start saving called ‘How to save for a big ticket item’ at the Credit Union Locator website.
Credit is great to have and can be an excellent financial tool when used wisely. Arm yourself with the facts, read the fine print, and have a plan in place before you charge, especially when it comes to those “big ticket” items.
Have you ever purchased a big ticket item on credit? Did you have a plan in place for paying off the charge? If given the choice would you use cash or credit?
The Divorce Coach Says
I use a credit card to pay for virtually everything. I like the convenience, I don’t like carrying cash and I can download activity reports from the card company if I want to analyze my spending. I also pay off the credit cards each month. So yes, I do buy big ticket items on credit card. I know that some cards do offer buyer warranties that protect you from breakages or loss of your purchases within a certain timeframe. There’s usually an extra fee for this and I have never purchased that. It just has never seem worth it.
I have also taken advantage of the “zero-percent financing” deals where you buy the item but don’t have to make any interest payments for a year and sometimes you don’t have to make principal payments for a year. However, I’ll only do this when I have the money and want to keep it invested for the extra time. When the deadline for interest-free comes up, I make sure I pay that debt off.
The website Suzanne mentions for the Big Ticket item calculator has a ton of useful calculators like whether to lease or rent a care, whether to refinance and the impact of making extra payments on your mortgage. Definitely worth checking out.
Suzanne is a certified credit counselor.
Photo credit: Pacific Yooper