Beware of engagement ring financing deals
By Erica Sandberg
January 12, 2016
I am buying an engagement ring from Kay Jewelers, and it has two financing offers that look good to me. They said I could get either of them because my credit is good. One is 12 months of free financing, and the other one is a regular credit card through them. I already have a credit card (Chase), but my limit is $1,000 and the ring is $2,499, so I obviously can't put it on that card even though I have no debt on it. Which is the better offer? — Peter
Congratulations on your upcoming nuptials! And my wedding gift to you is helping you choose between the two offers.
Taking advantage of the jewelry company's financing plan can be advantageous, but you must be careful to adhere to the terms of the agreement. As long as you pay the entire price (less the 20 percent it requires that you put down) in one year or less, no interest will be added. Skip a payment or fail to bring the balance to zero by the specified time frame, however, and all the interest that would have been applied to the loan will be unceremoniously plonked on your bill. According to the terms listed on the application, the APR can be up to 24.99 percent, which would mean hundreds of dollars in additional interest — which might cut into your flower arrangement budget.
To prevent this from happening, you'll need to make sure that you can pay at least 1/12th of the balance every month. For the ring you want, the quick calculation looks like this (don't forget to add in your state's sales tax to the total price):
$2,500 – $500 for the down payment = $2,000/12 months = $167 payment.
Review your budget for feasibility, and pay more than that monthly amount if you can. In fact, a prudent way to approach such financing deals is to calculate the payment based on 11 months instead (which would be about $182). Have that amount deducted from your checking account and deposited into the Kay Jewelers' account. After that, all you'll have to do is check that the payments are posted correctly.
Another benefit of the store financing plan is that you'll have a different type of credit product on your credit report. One of the scoring factors for FICO is your credit mix. You have a credit card, which is great (presuming you use it regularly and responsibly), but by adding another type of credit you'll be proving that you can handle a financing plan, which is similar to a traditional loan. A credit card is a revolving credit line, so the balance can go up or down every month depending on activity. But with financing plans and loans, the debt perpetually declines with consistent payments. Mind that your FICO score may decline at first because you've applied for a new credit line and you'll suddenly owe a large sum of money, but when it's paid off your score should be even better than what it is now.
As for the store credit card, it also can be a fine way to get your fianceé the ring of her dreams, though unless you pay the balance off right away, it will be accruing finance fees. No down payment is required so you don't need to have any cash on hand, which could be helpful if you're totally tapped out and want to spread the cost out over a few months.
To keep the cost of credit card debt to a minimum, pay the maximum. Treat as you would the financing plan with a fixed monthly payment. For example, you will delete the $2,500 balance (plus sales tax) with 12 equal payments of $238, and the total interest (using the same high rate as the financing plan) will be about $352. If you drag it out for three years you'll be socked with $1,078 in interest — more than enough to buy more bling.
My opinion? Of these two options, the first is best, but if you pay the second balance off quickly, the difference will be negligible. Now go forth and have a wonderful wedding!
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