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Should I Use a Credit Card or a Loan to Make a Major Purchase?

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Whether you find it exciting, nauseating or a little bit of both, spending a lot of money requires some serious decision-making. Usually, it revolves around a single question: Where is this money coming from?

If your savings are an option, that’s sometimes the simplest route — that way, the purchase doesn’t affect your credit, and you avoid going into debt. But if you don’t have the cash to buy what you need, you’ll need to find financing (or forgo the purchase). Common options include credit cards and personal loans, and the best choice for you depends on a variety of factors.

The Pros & Cons of Credit Cards

Using a credit card to finance a large purchase could either be a smart or terrible choice. Unless you’re willing to open a new credit card, it’s probably the latter. Interest rates on credit cards tend to be higher than those for personal loans, with the average annual percentage rate around 15% right now. You have to look at your specific account terms, but don’t be surprised if you see a credit card APR somewhere in the 20% range, especially if you have a credit card with some rewards system. (You can go here to find a guide to low-interest credit cards.)

Even if your credit card has a low APR, you could do a lot of damage to your credit score when a large purchase pushes you towards its credit limit. Generally, you want to keep your credit card balances at less than 30% of your overall credit limit. A credit utilization of less than 10% would be even better. You could negate that issue by requesting a credit limit increase through your credit card issuer before you buy the big-ticket item, but there’s no way to know if the issuer will approve the request and how much of a limit bump they’ll give you. (The request could also generate a hard inquiry, which can ding your credit score.)

Opening a new credit card, however, can help you make a big purchase interest-free. Many credit cards offer promotional periods of 0% financing. For example, Chase Slate (reviewed here) offers 0% financing on purchases and balance transfers for the first 15 months.

With careful planning and no financial hiccups, a credit card with 0% financing can be a great strategy for making large purchases. Just be careful to read the terms and conditions. Some credit cards (often in-store options like retail credit cards at furniture or jewelry stores) have retroactive interest. If you don’t pay off the balance within the promotional period, you could owe interest on the entire purchase effective from the date of purchase.

Issuers generally approve only consumers with great or good credit for the best low-interest or balance transfer credit cards, so check your credit scores before you apply. You can see two of your credit scores for free each month on Credit.com. One more thing: You won’t know what credit limit the issuer will approve you for, so there’s a chance it might not be enough for what you’re trying to buy. Again, higher credit limits tend to be reserved for those with great credit, though income is a factor in that, as well.

The Pros & Cons of Personal Loans

Getting a personal loan can be a bit more straightforward than the credit card route. You apply for the loan, request a certain amount of money, and the issuer determines what you’re qualified for. The interest rate you pay will depend on several factors, like your credit score, your ability to repay and how much money you’re requesting.

Personal loans are installment loans, like a mortgage or auto loan — you pay the debt back by making a set payment over a specified period of time. As such, the debt has a definitive end in sight, unlike a credit card, which you could continue to charge indefinitely. On the flip side, a personal loan’s fixed payment doesn’t afford the same flexibility as a credit card should your financial situation change — though that may be a good thing, depending on your spending habits.

Just like with a credit card, there are some drawbacks to taking out a personal loan. First of all, you have to apply for credit, which results in a hard inquiry on your credit report and will ding your credit score in the short term. There’s also an aspect of credit scoring that looks at your outstanding loan balances and the progress you’ve made paying them down, so a new loan would’t be great in that regard. At the same time, that’s not as influential as a high credit card balance would be.

Figuring out the best way to finance a major purchase requires a little research and understanding of how your financial situation fits into those options. Start by checking your credit standing, and see what offers might be available to you. Regardless of the route you take, stick to your debt-payoff plan as much as possible to avoid paying more than planned or damaging your financial well-being.

At publishing time, the Chase Slate is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

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Image: AndreyPopov 

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  • william smith

    thank’s for sharing this

  • Finwizzloans

    Good points…Personal Loan as compared to Credit Card usage is a better option…

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

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