I bet that when you started reading this blog or other blogs that have the same topic (which is finances of course), you already have some knowledge about budgeting and not overspending.
And mostly sure you are familiar with credit cards and how they work. And what is more interesting is how credit cards with fixed payments/rates function.
To better describe my post, my credit card (which is a bit awesome, in a way), has a nice offer of fixed rates with no interest. I have a limit and when I make a purchase, I can opt for a number of fixed rates to pay it back. Every month I have a certain sum to pay and if I deposit more it will be deducted from next month’s fee. But this is how my card works and my examples are based on this assumption. It’s very possible there are multiple types out there, in the wild (so be very careful if you have the same options or not)
Before going into the article, this is just my personal experience with credit cards and if possible avoid them. It is the same feeling that you have to pay a credit and I strongly advise to not be used if you don’t have a good relationship with keeping up your budget (otherwise you could end up in some hard situations).
Does this type of credit card help?
Let’s see some math regarding this process and how much (and if )it can help. For a period of a year, we will have multiple items bought using this credit card with a number of fixed rates (depending on the item), with no interest and with random monthly deposits. To make it easier, we will use the UM abbreviation (for unit of measurement. Instead of saying 1 EUR, 10 USD we will have 1UM, 10UM)
The first item we buy is a Nespresso machine(C1) that costs 1200UM and we can opt for the maximum of 12 months, this will mean a 100UM per month with no extra costs. My idea is to always opt for the maximum amount of rates, so the monthly payment is the smallest.
And here, the fun part comes in. We did opt to pay it with a credit card, but from this month’s budget, we have a rest of 300UM. So we just use it for an advance on the rates. Considering this, with the money, we just basically paid the first 3 rates, so we expect that in the 2nd and 3rd months, our rate will be 0.
The next step in the scenario is that in the second month we pay rates equal to 0UM and in the 3rd month we buy a Car Insurance(C2) in the value of 400 UM. We expect that from the 3rd month to have a rate of 150UM(100 from the Nespresso machine and 50 from the insurance).
But what happens if in the 2nd month we pay in advance 50UM? Well we expect that in the 3rd month our car insurance rate is already payed.
The next scenario is more complex. So we have the Nespresso machine for 100UM monthly starting from the 1st month, the car insurance for 50UM starting the 3rd month and we decide to buy a TV(C2) for 720UM and 6 fixed rates starting from the 7th month and add an Office Chair(C4) for 900UM and 3 fixed rates starting the 9th month. If we do a sum of all these we expect that in the 9th month we have a rate of 570UM (way over our budget). But if we make small contributions each month and we pay in advance we are diminishing the pressure of the rate. Take for example the 7th month when the fixed rate is 270UM but in the 6th month we paid (in advance 140UM) so now the rate is 130UM.
The process of the credit card is simple, you have a total sum to pay and each rate is deducted first from the overflow you deposit, then it informs you for the remaining of the rate.
Can it get better?
Now, considering we decided to take the chance and pay the spare money, each month, to the credit card and don’t wait for the monthly payment, I have another proposal for you.
What happens if, when having a smaller purchase to make, like a SDD drive for your laptop, let’s say for about 300 UM, and you have the money available, but instead of buying it cash you buy it with the credit card and use the 300UM there.
Let’s add to the previous table the C5 which is a SDD drive for 300UM ( in 6 months) starting the 7th month.
The math is simple. In the 7th month we paid the needed 130UM for the leftover rate and we also deposited the 300UM that was the price of the SDD drive. Like this we didn’t overflow the budget for the month and we contributed to the rate of the 8th (paid in full) and the 9th month. As you see the 9th and 10th month will be hard but we can pay the rate (as much as we can in the 8th month). If we opted to not get the SDD drive via the credit card, we would have the same expense in the 7th month but a bigger financial pressure in the following months (7th – 270UM, 8th – 570UM and 10th – 570UM).
Has it “been good or bad”?
- It is a good way to make more ‘affordable’ some expenses that are higher than the monthly budget
- It is a better option that a personal loan
- Paying in advance with the monthly budget for expenses or debts (my debt money as I like to call it) can further reduce the financial pressure of incoming rates
- You still get all your items, but instead of making some financial pressure each time, you can distribute the expense on a whole year
- I strongly advise not to use the credit card if you are not in a good relation with a monthly budget
- It is a new line of credit you are using, so an extra expense each month ( I am not sure if you have a chance to opt out/skip a month – I have a minimum value to pay)
- It can become addictive and get out of control
- Some say you don’t feel the expense as the money doesn’t disappear from your wallet or bank account – so an emotional factor
So which method of payment are you using for your next purchase?
Thank you guys for reading this article. I would love to hear your opinions. If you really enjoy the article, I think we have a like or share button around here.
Disclaimer: I am not a financial consultant, all the information you find here are my decisions, I taken at that moment, on my own analysis. I am open to any type of discussion about money. If you want to replicate my portfolio take into consideration that it is your money.