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Putting a Large Purchase on a 0% Credit Card: Smart or an Excuse to Carry Debt?

Dec. 29, 2014
Credit Cards
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When you’re ready to make a big purchase, such as a dining room set or a fancy new bicycle, it’s important to be smart about how you pay for it. Some purists think that if you can’t afford to pay cash, you can’t really afford it. There’s a lot of merit to that perspective. But sometimes even if you have the money saved, you’d rather keep the cash around for emergencies. Or perhaps you don’t have a choice about waiting until you have enough in the bank. Some major purchases, like a new engine for your car, have to happen now — even if your bank account isn’t ready for them.

If you’re going to finance a big purchase, look for the best terms and interest rate. Some people decide to use a home equity loan, which can have tax advantages because mortgage interest can be deducted. But home equity loans take several weeks to set up and sometimes have steep origination fees. Peer-to-peer lending is another option, as is getting a personal loan through your bank. And if your purchase is coming from a store, ask whether it has financing options with reasonable interest rates.

But in most cases, credit cards are people’s go-to source of temporary funding. If you’re going to use plastic, zero percent credit cards are much more appealing than paying astronomical interest rates.

The decision to use a credit card to finance a big expenditure comes with a big word of caution. If you can qualify for a low interest credit card in the first place, you probably have a good credit score. Of course you want to keep it that way. A hefty purchase can increase your debt-to-income ratio, which will have a negative impact on your score. And to get rock bottom rates you might have to apply for a new card, which also dings your credit.

Then there’s the long-term impact on your finances. Are you sure you’ll be able to pay the purchase off before the zero interest period is over? Will this become a habit — financing big purchases instead of saving up for them — or is this just a one-time strategy? Be honest with yourself: Do you really need to make this purchase now or could you save up for a while longer? Is the idea of paying no interest just an excuse for spending more than you should?

It’s also important to look at how exactly you’ll put the purchase on the 0 APR card. Many such offers are for only balance transfers, not for new purchases. So you might have to buy that grand piano for your protégée daughter on an existing credit card and then transfer the balance onto a lower-interest card, which means you’re likely to incur a transfer fee of about 3%.

Using a 0% credit card to finance a big purchase isn’t a terrible idea. In many cases, it’s the best choice. But do your research before you jump in and make sure the fees and risk of getting deeper into debt don’t outweigh the benefits.

Image via iStock.