Can a Credit Card Ever Be the Right Way to Finance a Big Purchase?

If you're making a big purchase, ideally you will save up for it and pay the cost out of your checking account. Doing this enables you to avoid interest charges, which only add to the cost of whatever you're buying. You can also avoid getting stuck with a monthly payment that eats up your future income.

But many people don't live in an ideal world and they still have to finance big purchases. Both credit cards and personal loans are often used to do that, but credit cards have a bad reputation, and borrowers are often advised to steer clear of carrying a balance on them.

The big question, though, is whether using a card ever does make sense to finance something you're buying. And the answer might surprise you.

Here's the problem with using credit cards in most cases

In most cases, it really is a bad idea to use a credit card to buy something you aren't going to pay off right away. The bad reputation cards have is deserved, as the vast majority of cards really do charge you an exorbitant rate if you pay off your balance over time.

In fact, according to the Federal Reserve Bank of St. Louis, the average credit card interest rate on all credit card plans was 20.09% as of February 2023. That's a huge amount of interest. In fact, let's say you borrowed $1,000 and committed to pay it off over the course of a year. At 20.08% APR, you'd still get stuck paying $93 in interest over the time you borrowed.

By contrast, if you were able to get a personal loan at just 6.00%, you would pay only $28 in interest, saving more than $65.

Credit cards also tend to require pretty low minimum payments, so if you didn't commit to paying your balance off in full during a short period of time, you could get stuck paying a fortune in interest over time.

In the above example where you borrowed $1,000 at 20.08%, if you made a minimum payment equal to 2.00% of your balance and didn't pay any extra, it would take you 197 months to repay the debt and you'd end up spending a total of $3,168.62 during that time -- more than three times your initial purchase cost.

By contrast, a personal loan would usually come with a fixed pay-off schedule that is designed to pay off the loan in a reasonable period with steady monthly payments. If your personal loan had a one-year repayment timeline, then you'd only pay that $28 in interest mentioned above and would be debt-free by the end of the year as long as you paid as required.

Obviously under these circumstances, a credit card is clearly the wrong way to finance big purchases.

A 0% APR credit card could be the right choice in this situation

There is, however, one exception to the general rule that you shouldn't use a card to buy something you can't pay off immediately. That exception is if you have a 0% APR card.

Some card companies offer a 0% APR for new purchases when you become a cardmember. You may have this special introductory rate for a year or so. If you can sign up for a card with a 0% rate and pay off your balance before the promotion ends, you'd pay no interest at all. That would be a better deal than the personal loan.

You do need to make absolutely sure you can repay your balance before the promotional rate is done, though -- which means paying more than the minimum. Calculate how much you must pay each month (which would be about $83 per month for a $1,000 purchase) and then set up automatic payments for that amount so you don't end up missing payments and getting stuck with huge interest charges.

If you can find a good 0% APR card and you can take these steps to pay it off, that's most likely the best option to finance a big purchase, other than withdrawing the money from your savings. If you can't do that, a personal loan is a better bet. So be sure to research card options carefully, consider your ability to make monthly payments, and make an informed choice that's right for you.