Credit Card Purchases: Think Before You ChargeOctober 21, 2010 - 8:54 am
How much thought do you give to your credit card purchases before you hand your credit card to the cashier? If you give any thought to it at all, it’s probably not enough. Considering you could be paying for your credit card purchases for months, even years to come, you should think about a few things before you make a charge on your credit card.
Do you have enough available credit?
Charging up your credit card comes with consequences. First, if you go over your credit limit, you could be charged a fee for it. Fortunately, you would know this ahead of time because credit card companies can’t charge over-the-limit fees unless you’ve opted-in. Otherwise, the other limit transaction would be declined. Either way, it’s something to consider. Being declined is just as bad as paying a fee.
If the new purchase puts you close to your credit limit, you could lose credit score points. Thirty percent of your credit score considers your credit utilization, which is the amount of your available credit that’s being used.
Can you afford to pay for the charges?
In general, it’s better to pay your credit card purchases in full when the credit card statement comes. That way, you avoid paying interest on the purchase and you have the balance out of the way.
If you can’t afford to pay for the balance in full, will you be able to pay the minimum payment. Credit card minimum payments generally range from 1% to 3% of the total credit card balance. The higher your balance, the higher your minimum payment would be. Don’t charge if a new purchase will make your minimum payment unaffordable.
Is there another type of balance on the credit card?
Different types of balances have different interest rates. For example, balance transfers usually have a higher interest rate unless you have a promotional rate. If you have two types of balances on your credit card, payments get tricky.
The minimum payment usually goes to the balance with the lowest interest rate (typically purchases), while the remainder of the payment must be applied to the highest interest rate balance. This means that lower-rate balance is accruing interest. Putting that purchase on a credit card without another type of balance is better.
Are you applying for a mortgage soon?
Mortgage lenders prefer that you not make any major purchases within 6 to 24 months before getting your mortgage. During that time, you shouldn’t be making any new credit card purchases. Instead, you should be focusing on paying down your credit cards so you can qualify for a better mortgage.
What about your other credit card balances?
Just because you have available credit on this credit card still doesn’t mean it’s ok to make the charge. Your overall credit card debt should also be taken into consideration. If you’re already having trouble paying your current credit card bills piling on more debt will only make it worse. Only make the credit card purchase if your credit card debt is low enough to take on more.