Used the right way, credit cards can help to pay down debt faster (like with a balance-transfer credit card strategy) or help you build your credit score and land better loan rates. But interest charges can pile up when you use credit cards for what may be the wrong purchases.
With that in mind, Motley Fool credit card specialist Nathan Hamilton and Fool.com deputy managing editor Michael Douglass discuss in the video below two purchases cardholders may want to avoid placing on credit cards, along with some other, cheaper options to consider.
Michael Douglass: Nathan, let's talk a little bit about things you should never pay for with credit cards. OK, "never" is a strong word...
Nathan Hamilton: It's a very strong word.
Douglass: Generally you shouldn't.
Hamilton: But if we can get as close to possible legally saying never, and have it be true, these are going to be some of those examples.
Douglass: Pretty darn close. So let's start with home renovations.
Hamilton: When it comes down to home renovations, there are just better options out there than credit cards. Credit cards provide an easy way to access money, but for that convenience there is, of course, a higher APR. A higher interest charge. And [with] many credit cards, the average interest rate is in the high teens, so around 18% to 19%. Many cash back cards are actually above 20%...
Hamilton: So when you compare it to the other options that are available for homeowners, be it a HELOC [home equity line of credit] or various other funding, the rates are just so much better going that route. Now the thing is it takes more time [and] it takes more effort, but usually the juice is worth a squeeze, financially speaking. You're going to be paying less money out of pocket or interest over the time of that loan.
Douglass: Right, absolutely. And let's talk about big-ticket purchases, too. TVs. Cars.
Hamilton: This one may be up for debate. Some people say put big-ticket purchases on credit, because depending upon the credit card, you do get some various warranty benefits and so forth, and that is a valid thing to look at. But if we look at The Motley Fool as a whole, what we want to do is ensure people are meeting their budget and investing in the future to earn more money to set yourself up for retirement. And putting big-ticket purchases on credit, which we know is a convenient, easy way to do it, is an easy way for us to just say, "OK. I'll just buy that new TV."
Hamilton: Instead of saying, "OK, do I actually have the cash to pay for that new TV?" So what I should say is [a] big-ticket purchase -- ensure you've got the money to pay for it, and then think about putting it on credit. If not, it probably shouldn't be a purchase you're looking at.
Douglass: And that goes both ways -- with both big-ticket purchases and home [renovations]. If you have the $10,000 sitting around, there's no downside to putting it on the credit card and then just paying it off at the end of the month. But most people don't have that. We know that most Americans have reported that they couldn't come up with $1,000 in a sudden emergency without...
Hamilton: It's astounding.
Douglass: Yes, it totally is. Without resorting to either debt, or liquidating investments, or something else. They don't have that kind of money in cash. So the roof springs a leak. Chances are pretty good you don't have that kind of cash sitting around, so it's best to approach some of these other things instead of going through a credit card, and the same thing with, maybe, that Black Friday sale.
Hamilton: You just have to be realistic about it. With credit cards, they're just super convenient to use. It's easy just to whip it out and say, "OK, put it on plastic," and not think about the actual purchase. But it is something that consciously we have to fight against what our brain is saying to us, because we get a high from finding a good deal or shopping for purchases. You have to fight against that to actually say to yourself, "Is it within my budget? Can I afford it at this point?" With big-ticket purchases, yes you do get some of the warranty value out of it by putting it on a credit card, but the most important thing to us at The Motley Fool is [whether] you are actually meeting your budget and [whether] it makes sense.
Douglass: Right, absolutely. For more on budgeting, credit cards, and credit scores (including The Motley Fool's top credit cards of 2017), check us out at fool.com/credit-cards. And again, that's fool.com/credit-cards. Nathan, always a pleasure.