My husband and I just moved into our first home. Money is very tight right now because we also just had our first baby, and I’m no longer working. Our new home is larger than our last and we need furniture. We don’t have any money in savings right now, so we only have two ways to go: One is to use my husband’s credit card and buy the furniture with it at 18.9 percent APR and the other is to open the store’s credit card (Macy’s) and use their 0 percent financing deal. I know that getting a new credit card will hurt our scores though, so which do you think is the better idea? — Marsha
Oh boy, I don’t think you’re going to like my response … because I think you should scramble up some plastic crates, give ‘em a good scrub and use them for everything from makeshift dining tables to chairs and bookshelves.
Look, I know it’s tempting to use credit to furnish your new home, but it doesn’t appear that you can afford to play interior decorator right now. You have nothing in savings and only one of you is earning a living. That puts you in a terribly precarious financial situation!
What happens if your husband loses his job? Or if you have a sudden, large and truly necessary bill to pay for, like a medical crisis or a home expense that is not covered by insurance? With a newborn who is totally dependent on you for
financial security, both of you need to be committed to setting cash aside for the unexpected.
Before you buy anything major — either with cash or credit — scrimp and save. Accumulate at least a few month’s worth of necessary expenses (such as mortgage, groceries and transportation costs). Once you have a decent sum squirreled away, you can begin to consider ways to swap the crates for something lovelier.
Saving for the furniture so you can pay with cash is the best way to go, though charging the items can be OK too — as long as you have a plan to repay the debt in less than a year.
So let’s return to the 0 percent financing versus existing credit card debate. Here’s a comparison, if you were to spend $5,000:
If you used the credit card at 18.9 percent APR, you’d have a $461 monthly payment with total interest charges equaling $527.
If you used the store deal, you’d have a $417 monthly payment with total interest charges equaling $0.
Slam dunk in favor of the store card, right? Well, only if you pay the entire balance when you should.
If you don’t pay off the balance before the promotional period expires, it looks like Macy’s will add 26.99 percent worth of APR financing charges back in, not to the balance you have remaining, but to the amount you borrowed in the first place (see
Macy’s website for more details). That would mean you’d instantly owe another $761!
To add to the ouch, that’s a mighty high interest rate that will continue to accrue on the outstanding debt. You could be paying that sofa set and entertainment center off well after they’ve become shabby.
Determine if you can easily afford the monthly payments by delving deep into your
budget. After setting cash aside for emergencies and paying for essentials, do you have another $500 bucks or so to go to your home furnishing goals? Only you and he know for sure.
Lastly, opening a new credit card shouldn’t hurt your credit rating (beyond a temporary ding from the lender’s inquiry). However, if you were to go for the store’s 0 percent financing offer, the amount you borrow will show up on your credit report as a loan, which will be factored into your
FICO score. This very well may bring those numbers down until you pay off the debt — after which you may see a spike because you proved you could handle that type of credit with aplomb.
(Oh, and if you’re really opposed to crates, have you explored garage sales or asking friends and family members for cast-offs?)