From furnishing your new home to booking last-minute travel to tend to an ill loved one, credit cards can be a helpful tool as you deal with life’s big, expensive stuff.
“I just recently had a client who was going through IVF, which was a major purchase,” says Chris Hernandez, an investment advisor in Austin, Texas. The couple signed up for a new card to pay for the cost of fertility treatments, eventually gaining both a sign-up bonus and a baby.
Credit cards can earn lucrative rewards, making the money you spend work harder for you. But they can also help you make a necessary purchase quickly, and pay it back slowly, potentially without interest payments if you choose the card you use strategically.
Large, planned purchases
Being able to anticipate a major upcoming expense puts you in a sweet spot. Depending on the nature of the purchase, you may be able to set a budget, comparison shop and save up incrementally to avoid getting into debt. You can also use that time to apply for a credit card with an appealing offer for new cardholders.
Sign-up bonuses
One of the ways many cash-back and travel rewards credit cards entice new customers is by offering sign-up bonuses that are, in some cases, worth hundreds of dollars in value. But there’s a catch — usually you must spend a substantial amount on the card in a relatively short period of time to qualify for the bonus. For example, you may need to spend $3,000 in the first three months you have the card.
Your day-to-day spending may not get you that bonus, but this is where a large, planned purchase comes in handy. Your next vacation may be partly funded by an engagement ring or your kid’s college tuition payments.
Just keep in mind that if you’re unable to pay your credit card bill in full and end up taking on debt simply to earn a bonus, the interest you’ll pay could wipe out the value of that bonus. If you intend to pay your purchase back over many months, other credit card options may be more appropriate.
0% APR offers for new purchases
A card offering a 0% APR promotion for a year or longer gives you time to pay down a large balance without spending additional money on interest. Knowing a big expense is coming up means you have time to apply for, and receive, a new card to use on that purchase. But, again, there’s a catch. If you still have remaining credit card debt at the end of the no-interest promotion, you’ll begin to owe interest on that remaining amount.
“Be aware of all of the fine print in the deals,” says Carla Adams, a certified financial planner in Lake Orion, Michigan.
Unexpected expenses
If you’re using a credit card to cover unforeseen costs, do so carefully. “Using credit cards should definitely be more of a last resort, and I encourage everyone to have an emergency fund on hand,” Adams says. “Of course, that’s not always possible.”
Still, some credit cards have features that can be helpful when you’re faced with a financially difficult time, like dealing with job loss or large medical bills.
Grace periods
The period of time between the date your statement closes and the date your credit card payment is due is called a grace period. During this time, which is typically around 21 days, you won’t be charged interest on your balance.
It’s only after the payment due date, if you don’t pay the entire statement balance, that you’ll begin to owe interest. This can give you a window of time to set aside money for your upcoming bill, especially if you earn a paycheck during that period.
Buy now, pay later features
A number of credit card issuers offer installment payment plans for eligible purchases made with your credit card. You can split a purchase of, say, $100 or more into several equal, smaller payments. You may be subject to a fee or interest payments, but this still may cost you less than paying the credit card’s official ongoing purchase APR.
Balance transfer credit cards
Balance transfer cards are similar to cards that charge 0% APR on new purchases, only they allow you to move existing credit card debt over from a card charging a high interest rate. If a period of financial hardship left you in debt, this could be an option to lower the cost of that debt while you pay it off.
Note that you typically need at least good credit (FICO scores of 690 or higher) to qualify for a balance transfer card, and many charge a fee that’s a percentage of the transferred balance. Also, once the no-interest promotional period ends, you’ll owe interest on any remaining balance.
Unused rewards
Points earned on a cash-back card don’t actually have any cash value if you just leave them unredeemed in your card’s rewards account. If you haven’t redeemed rewards in a while, you may be sitting on a sum that can meaningfully offset the cost of your next credit card bill. Some cards even allow you to request a direct deposit of your rewards into your bank account.
Unredeemed travel points can come in handy when you need to travel for an emergency and the cost is otherwise prohibitive.
Proceed with caution
For all their useful perks, credit cards make it far too easy to wind up in expensive debt that’s hard to get out of. It can make an already expensive time in your life even harder to afford. You can’t predict everything that will happen, but it helps to plan ahead. An emergency fund of even just a few hundred dollars can make it possible to limit your debt, or stay out of it entirely.
And if you do wind up in debt, make it a priority to get out as quickly as you can.
“Try and come up with a plan to pay off the credit card within a reasonable amount of time so you don’t fall into a credit card debt spiral,” Adams says.
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