Avoiding credit cards because of the high interest rate is a recommendation that you may have already heard or read, however, depending on your financial situation, buying on the card may be a good option.
Surely you have already found yourself wondering if it was better to pay cash or make a credit card installment, this is a common question.
Buying cash, according to most experts, is the best option when you have the money available, as it can guarantee a discount so you can save money. However, sometimes using a credit card may be necessary and more advantageous.
See today’s article for situations where it is worth paying cash or using a credit card, check it out.
If you have the money available.
If you have saved to make a purchase or have an available balance in your account to make a purchase, using a credit card is less advantageous than making a cash purchase.
The great advantage of buying in cash is the fact that it is possible to save money, as the vast majority of merchants offer good discounts for those who choose this payment option.
However, if your money is invested, perhaps using a credit card and buying in installments may be the best option.
To be sure, what you need to do is to evaluate if the cash discount is greater than the cash yield, as well as the interest embedded in the installment purchases.
For convenience, you can use a shopping simulator. There are several such tools available on the internet, just you search.
To better understand how this simulation works and to decide when to use credit card and make an installment is the best option, we will exemplify for you.
When is it better to make the purchase through installment and leave the money applied
Let’s say you have your money invested in Treasury Direct and you want to buy a new tv, but you haven’t decided whether it’s worth withdrawing your investment money and buying or using your credit card and keeping the money yielding.
When researching the prices of the television you want you have seen that the best price of the same is 1760 USD that can be divided into up to 10 installments of 176 USD without the addition of interest.
In this case, doing the math, you can see that using the credit card and buying in installments is more advantageous than the view, allowing you to save 73.11 USD.
The difference in this case is that the yield on the money invested is higher than the interest on the installment purchase, so it is more worth keeping the money on the application than withdrawing it to make the cash purchase.
In general, when the installment is interest-free, using the credit card is a good option, especially if the money is invested in an investment.
When buying in cash is the best option
Now let’s imagine a different situation, when using a credit card is not worth it and buying cash will be the best option.
You still want to buy the same television, but searching the internet, you realize that you can buy it for 1584 USD or in a 10 times installment of 176 USD per month.
In that case, using the credit card is not worth it. It is better to withdraw money from the application and make the cash payment.
Buying cash, in this situation, the economy will be 118 USD. This is because the income from the money invested in Treasury Direct ends up not being greater than the discount obtained by the cash purchase.
Depending on how the money is spent, it is better to buy cash or term
Now let’s think about a different situation. Let’s say you want to buy a refrigerator and you have a certain amount of money in your savings account, but you still don’t know if it’s worthwhile to withdraw the savings and make the cash purchase or use the credit card and installment purchase.
Searching, you found the refrigerator you want costing 3420 USD, and you can split the purchase in 12 times of 300 USD.
In this situation, by doing the math, you will find that the cash purchase is more advantageous, since you could save 60.57 USD.
However, if the money was not being invested in the savings account, but in an investment that offers a higher monthly income than the same.
In this case, making the purchase in installments would be more worthwhile, with a savings of 31.26 USD.
Even at first glance, the values here seem small, if you think long term, these small savings with each purchase will have a big impact on your financial life.
More details on the subject
As you may have realized, to know if using a credit card or buying cash is worthwhile, you should evaluate certain factors such as:
- The price of the good to be purchased in cash;
- The value of the installments;
- Interest on installment payments;
- If your money is stored in a financial application;
- The yield on any financial investment;
- Whether or not the yield on the investment exceeds the installment interest rate;
Another factor that you should be careful to consider is the following, when installment is the best option, you should also be careful not to accumulate installments of multiple purchases to pay within the same time period.
This can compromise more of your budget than what you can afford each month.
Therefore, before starting a new installment payment it is important to pay off the previous installments, otherwise you may have problems.
If you have no money invested in an investment, the best option is always to buy in cash, as you will hardly find a loan option that has lower interest rates than those charged on credit card installments.
Credit Card Benefits
Another factor that may make using a credit card to make a purchase more advantageous is when the card service offers certain benefits to the customer.
To enjoy these benefits, however, you must use the card with discipline and planning.
Your credit card can even be a good ally when you need to make a higher value purchase, especially if the good costs more than half of your monthly income or if you can’t find a good cash discount.
When you are out of cash in your checking account at the end of the month, your credit card may also be useful to cover any eventuality or purchase items needed for you, such as grocery or fuel, for example.
One of the great advantages of buying on the card is that you can choose the day you pay, but ideally you should choose a date close to the date your paycheck is paid.
If you don’t want to curl up with the bill, the tip is to keep up with your small credit card spend weekly. For this you can bet on finance control app. There are many available.
One more tip to use the card wisely is to not have many cards. You do not need to collect credit cards. If you have many, it will be very complicated to control your spending. Ideally, have at most 2.
If you have income that you earn on different days, you may have a credit card option that expires on receipt of each. If you only have your salary, having only 1 card is ideal.
Remember to pay your credit card bill always and on the due date. Interest on your revolving card or overdue charges is high and can cause your finance to break down. If you can use the automatic debit option, this is a good alternative.
Now, if there is no other way and you really have to install some card bill, until you make this installment, no longer use this payment option.
One of the biggest mistakes you can make is to continue using your credit card after you have not paid the previous installment payment.
In today’s article you learned about situations where using a credit card is most advantageous and when it is best to opt for cash payment. So you can consume more consciously and better organize your finances.