While there is a time and a place for credit — most of us won't ever be able to pay cash for a home, a college education, or even a car — there are also times when it should be avoided, at all costs.
It's difficult to delay gratification. It doesn't help that there's always a credit card or personal loan application in the mail. Still, there are certain times when it absolutely does not make sense to borrow money to make a purchase. For these big ticket items, think hard before you swipe your card or apply for that credit line. (See also: 7 Ways Pride Is Keeping You Poor)
1. A Boat
Depending on the boat purchased, a payment could equal the cost of a new car payment or — for a more luxurious option — the cost of a mortgage. At the same time, current boat loan rates range from about 4.5% for a $350,000 boat to as high as 6.25% for a $25,000 boat. That means that over a 15-year term, a modest $25,000 boat could end up costing $38,584. That's $13,584 more than the original sticker price.
When it comes to boating, though, the cost of the vessel is often the cheapest part of ownership. Additional costs to consider are state taxes, slip fees, winter storage, registration and licensing, fuel, insurance, and maintenance. Mint recently estimated the annual cost of a $20,000 boat upkeep at $4,300 per year or $358 per month.
2. Your Wedding
Getting married is one of the most exciting times in a young person's life, and yet… many don't fully realize all the costs that come after embarking on a new life together. Not everyone makes the same life choices, of course, but houses, children, college tuition, retirement accounts, and even new cars are expensive life items that many new couples choose to buy or fund as they build their lives together.
Starting a journey together with a pricey loan with a high interest rate is an expensive way to handicap yourself as you work to build a financially stable life together. When planning a wedding, it can be helpful to remember that it's just a big party. You'll have the memories when it's over, but it's the foundation that the marriage is built upon that's really most important. And that doesn't cost a dime.
3. Jewelry
High-end jewelry like engagement rings or tennis bracelets are expensive enough without adding in the financing costs. It may seem like good news that many jewelry stores are willing to help defray the costs by offering zero interest if the purchase is paid off within six or 12 months (depending on the store) but beware, there's usually a catch.
Miss one payment or fail to pay off the balance before the due date and, for most of the stores, interest will become due for the entire original balance — and it's usually at a rate that's somewhere between 23% and 29%. That means that a $5,200 ring (the average wedding ring cost) could end up costing an additional $1,461 in interest payments alone, assuming a 25% interest rate and a two-year term.
4. Furniture and Consumer Electronics
Store issued credit cards are common upsells at the cash register and, if you're buying a big ticket item like a new sofa or flat screen TV, it's easy to be tempted by the seemingly attractive financing terms. What many credit consumers don't realize is that store cards typically work in a similar way as jewelry financing, as described above.
The offer may state 12-months, zero APR (or 12-months, same as cash), but miss a payment and you'll reset the clock, finding yourself responsible for interest payments from the date of purchase, not from the date when the payment was missed. For a $4,000 furniture purchase, a missed payment could add $1,400 in interest to the bill, assuming a 24.99% interest rate and a 24-month term. In other words, that financed furniture (or computer or refrigerator or… well, you get the idea) could end up costing you a lot more than you expected.
5. Vacation
Most vacations last a week or less but, if you take out a personal loan or swipe a credit card to fund the getaway, it won't just be the memories that last a lifetime. Earlier this year, MarketWatch determined that you could raise a child from infancy to adulthood before you could repay a $2,000 credit card balance with a 18% annual rate, if you're making just the monthly minimum payment. That's 30 years in repayment, based on their analysis, and an extra $4,931 in interest payments.
For many purchases, buying on credit can cause a lot of financial strain. Before you buy, it's important to understand the full cost of the purchase, including the cost of credit. Most times, you'd be much better served by saving up, instead of swiping your card. Think before you borrow. Your wallet will thank you.
What purchases do you refuse to make on credit?