At the end of the day, credit certainly has its place in our world. And for that reason, we ladies need to make sure we use it to our advantage.
First off, we get it. It's so easy to use credit. Oh so easy! So many of us feel overworked, underpaid, underappreciated and overwhelmed. Easy is certainly attractive! To top it all off, large ticket items can be difficult to save for with ever-mounting financial pressures eating up what used to be leftover dollars.
That's where the stores try to help. (At least that's what they tell us.)
The credit catch
When it comes to those never-never plans, beware. What can often seem affordable and convenient can cause severe damage to your credit score.
Let's looks at an often overlooked example...
One no-no with credit is going over the limit. Even a penny over that approved limit can start bringing your credit score down almost immediately. For example, with some no-interest, no-payment plans, you might apply for a limit of say $1,600 based on the estimated cost of your purchase of $1,557.00. Without thinking, you then agree to the fabric treatment. All of a sudden, the balance on that $1,600 account is $1,602.45. Not a big deal, right? Wrong. If you've been offered this financing arrangement for say 24 or 36 months, that over-the-limit balance will sit there haunting and hurting your score the entire time.
Now, let's say you get to the end of the yellow brick no interest, no-payment road, and you don't have the full amount to pay the account off. Unfortunately, that's when the wizard appears and you understand the machinations going on behind the scenes. (Yup, you pay big.)
You built a new home and put all of your appliances on the never-never plan. The total bill for a washer, dryer, fridge, microwave, dishwasher and stove was $6,500 (not bad, right?). As such, you applied for a never-never plan for 24 months. Over the following two years, you had a combination of emergencies and financial setbacks that resulted in not having that $6,500 when the payment came due. Here comes the rub...
The day immediately following your inability to pay in full, the interest from the PAST TWO YEARS is applied to the account, most likely in the astonishing 30% range. Your new bill is thus not $6,500 but rather $10,985 and you will be charged that 30% interest rate on any remaining balance until you pay it off. Do your math. If you begin making hefty monthly payments of $500, it would take you nearly THREE additional years to pay it off and in the end, your total repayment on those appliances would be nearly $16,000. Not such a great deal, huh?
Do it because you don't have to do it
If you do choose to use one of these plans, it should never be because you have to. To protect your credit and make sure you don't pay more than the original purchase price, take the following precautions:
- Ask to see the approved limit and ensure the total end balance will not exceed that limit, not even by a penny.
- Confirm that the interest (that you don't have to pay at the time) is not going to accrue month by month showing on your credit score, even though it's never due if you pay it off on time.
- Only use these plans when you've got the cash on hand to pay it off at anytime and keep that cash safe and separate from other funds.
- If you have used one of these plans and you just can't manage to pay it off on time, then do whatever you can to use a line of credit or other form of less expensive credit (yes, even a credit card) to pay it off and avoid the back interest.
Save it, girl!
The lesson here is simple: SAVE for life's major purchases like furniture, appliances and home renovations.
Now, we are not about to suggest you save up cash to buy a home (that's just not realistic for most). What we are suggesting is that you prevent that powder blue chaise or sub-zero fridge from keeping you from realizing far more important life dreams.
It isn't always easy, but consider this: is there anything amazing you've done in your life that was easy? The struggle makes it so much more satisfying.
Your credit is your power. And you, my dear, need to keep it safe.
This article is published with the permission of the author, Stephanie Holmes-Winton, personal finance expert on debt and cash flow management. Stephanie is a Halifax-based advisor, author, speaker, radio columnist and the President & CEO of The Money Finder, Financial and Investment Solutions Inc. She is on a mission to see Canadians make meaningful changes in their spending habits and personal financial philosophies, ensuring they live the lives they long for using the financial power they already have (yet rarely access). You can reach her at firstname.lastname@example.org or check out more of her work at www.themoneyfinder.ca, www.advisor.ca or http://themoneyfinder.tumblr.com/.