I just got engaged to the love of my life. We have decided to pay for the wedding with credit cards. My fiance and I did a budget worksheet on The Knot and found out it will be $31,090 all told. My wedding dress alone is $6,000. I have a Capital One rewards card that has a $15,000 limit and a Chase card with no reward and a $20,000 limit. My fiance doesn't have any credit cards right now because he filed for bankruptcy in 2011. Can you help me plan for how much should go on each? We want the cash back and rewards, but I'm not sure if I should max the Capital One card out. I know you will think this is a stupid idea, so please don't say it. – Denise
Me, rain on your big day? Nah. I adore weddings and totally understand why people go all out. Blowing thousands on cake and costume is a highly personal decision, and, as long as you can afford it, I say bring on the luxe.
There are a number of economic and personal questions to answer before you start a-charging, however. Here they are, with my recommendations:
Do you really want to begin married life in debt? As a “Say Yes to the Dress” addict, I fully get the desire to splurge, but think long and hard about how it will feel when the bills start rolling in. The good must always outweigh the bad. If spending so much money now will negatively affect your life later, scale back on nonessential details.
Can you afford to repay just over $30,000 quickly? Credit cards are not intended to be used for long-term financing. It's true that many people treat them as such, but most regret it. The fees that are added to the balance simply make the arrangement too costly. Even if you're committed to deleting the debt in six months, you'd have to come up with about $5,440 per month. That's a massive burden, and you'd still pay around $1,600 in interest (assuming the cards have an APR of 18 percent). Stretch the debt out for two years, though, and $6,100 would be added to the balance. Say no to that.
Should you hit the limit on your rewards card? Using a credit card to build points that you can trade in for cash and other rewards is fantastic. Again, you have to pay the debt down fast — but this time in a month or two — to make it sensible. If you wait any longer, not only will the accumulated interest be more expensive than the rewards, maxing the card out and staying there will hurt your credit rating. A low score will impair your chances of getting a mortgage with preferable terms — so if you want to buy a home in the near future, don't do it.
Is your betrothed ready for better financial management? What a dream it is to find someone you adore enough to marry! But what a nightmare it can become when that person is financially irresponsible. You don't mention why your guy filed for bankruptcy, but if it's because he couldn't help spending more than he earns, he needs to learn how to properly manage his money and credit immediately. Take a personal finance class together (as a commitment to solidarity). Many community colleges offer them for a nominal price. Also check out a nearby credit counseling agency's free workshops. Credit unions often provide such education at no cost, too, so if you're a member, ask what's coming up.
As for how you should spread the debt out on the two cards initially, it hardly matters if the interest rates are similar. You've got $35,000 worth of borrowing power, and that means that you'll use almost all of it up with your proposed budget — unless of course you scale back or use savings to cover some expenses. Spending up to the limit of your cards will also hurt your credit score as you'll be maxing out your credit utilization ratio (the amount owed compared to the total credit available), which accounts for 30 percent of your FICO score.
If you can come up with a reasonable repayment plan that doesn't break your monthly budget, then go for it. Just remember that you'll be paying down that debt for months, and possibly years, to come.
I wish you two the very best.
Got a question for Erica? Send her an email.