Thinking about Using Your Credit for a Purchase? Follow These Simple Tips to Stay in Control
Ah, one of the burning questions of personal finance. Is it ever a good idea to use credit (read: debt) to make a purchase?
The answer is, like so many things in life, it depends.
If you’re taking on debt to purchase consumer goods or fund your lifestyle, no, it’s never a good idea.
If you’re taking on debt to build or expand a business, and you have a clear exit strategy, then using debt as a tool could work in your favor.
Let’s run through a few common scenarios, and see whether using credit to purchase will be to your advantage.
Purchasing everyday goods, furniture, etc. on credit:No, not a good idea. Unless you have a zero-percent interest offer over the course of a few years, it’s best to save up for these items and pay outright.
Credit cards, especially store cards, have some of the most outrageous interest rates of all debt. Steer clear of these pitfalls, and your wallet will thank you.
Oh, and in the name of all things holy, never rent-to-own.
Buying a car:Probably not a great idea, either. The same rules apply as above. If you can get a zero-percent loan, and the purchase price numbers make sense, then go for it.
If a 0% loan is out of reach because you don’t have perfect credit, go for a used vehicle that you can pay for cash.
Before you purchase any car, make sure you’ve calculated the true cost of ownership (maintenance, insurance premiums, and so on) over time. Whichever route you take, negotiate.
Buying a house: Unless you’re already financially free, this one’s probably unavoidable. Purchasing a home is the most expensive decision most of us will ever make.
If you don’t have hundreds of thousands of dollars saved, it’s tough to avoid a mortgage. Before you buy, calculate the cost of ownership over renting.
If you decide to buy, don’t let a realtor or loan officer talk you into taking a bigger mortgage than you can afford. Keep your housing costs (that includes mortgage principal, interest, taxes and insurance) under 28% of your monthly income.
Use your credit for financial moves that will pay you, and keep your lifestyle costs in check. The smarter you are with your money – and credit – the more financially successfully you’ll be in the long run.
Are you using your credit wisely? What steps have you taken to improve your credit and master your finances? Share your thoughts in the comments below.