How to Prepare Your Credit for Big Purchases
Are you in the market for a new house, car, or big appliance? Most people experience big purchases like these at different phases in their life. Some of these purchases can be made with multiple easy installments. As a result, your credit score could influence the overall cost or finance charges.
Therefore, you need to determine two things. First, you must decide if using a credit card works for you. Secondly, you should learn how to prepare your credit for big purchases.
In this post, we’ll share the benefits and drawbacks of using a credit card and what you need to do weeks or even months before to minimize interest or boost your chances of loan approval.
Let’s get started!
What Are Big Purchases?
A big purchase is any purchase that drains a huge percentage of your cash reserves or makes your debt-to-income ratio larger. In most cases, you can’t make these payments using cash and have to rely on your credit card to make. They typically include:
- Buying or renting a home
- Going on a vacation
- Buying a new car
- Wedding expenses
- Renovation
- Business equipment
- Home appliances, etc.
Benefits of Using Credit Cards for Big Purchases
Below are some of the most common benefits of using a credit card to make large purchases:
1. Rewards
Many credit card companies offer rewards to those who make payments on time with more points, discounts on other purchases, or freebies. Therefore, using a credit card is a smart way to maximize your payment strategy.
2. Chunk Payments
In many cases, buyers cannot pay for big purchases immediately. Using a credit card allows them to break the payments into smaller chunks over a specified period to make it more affordable for them.
3. Sign-Up Bonus
Many credit companies offer bonuses to people who opt for their cards, including points, discounts, or cash back. However, most require shoppers to reach a pre-specified spending target to unlock those benefits. Instead of making many small purchases, many people use their brand-new credit cards to make big purchases.
4. Protection
One of the most important reasons people use credit cards for big purchases is the extra protection on offer in the form of warranties, insurance, and purchase replacement, repair, or reimbursement. For example, suppose you’re in the market for a new fridge or oven. Some credit cards enable users to extend product warranties and increase their protection.
5. Emergencies
Many people rely on credit cards during a financial crisis to help cover their necessities. For instance, those dealing with medical emergencies without health insurance may not have sufficient funds to pay their bills. With their card, they can buy more time to cover all expenses.
Drawbacks of Using Credit Cards for Big Purchases
Using credit for a large purchase does come with a few drawbacks, including:
1. High-Interest Charges
The biggest drawback of using a credit card for any purchase is interest. Many credit cards charge high rates, especially for bigger expenses. Hence, they can easily drag anyone deeper into financial debt. Bigger purchases like homes and cars have bigger monthly installments than smaller items. Therefore, any interest applied to them could significantly impact your overall finances.
However, if you pay your bills on time and have an excellent score, you could prevent any extra costs.
2. Overspending
Many people tend to overspend with a credit card since they don’t exchange money tangibly and, in turn, cannot comprehend how much they have spent. As a result, they inadvertently overspend, especially on items they don’t need, and accumulate debt unnecessarily.
3. Credit Damage
Delays in payments or failure to pay for big purchases can hurt your credit score. If this issue persists, credit companies think they can’t trust you with borrowed money. As a result, they either stop doing business with you or increase your interest rates significantly to cover their expenses.
Preparing Your Credit for Big Purchases – 5 Effective Ways
Using or not using a credit card for big purchases is your choice. However, if you decide to do it, you must be careful. A simple misstep can be costly. Hence, learning how to prepare your credit for big purchases is crucial. Here are our five tips:
1. Check Your Credit Report and Monitor it Actively
The first thing you need to do before many a large purchase is to get a copy of your credit report to learn where you stand. You can also take this opportunity to check for inaccuracies, such as calculation errors, late payments, or malicious activities.
This way, you can raise a credit dispute to clear inaccuracies from your record. So, whether you’re looking to secure a loan for a new home or buy a new car, start monitoring your credit activity months in advance to identify where you can improve your score.
Sites, like the Annual Credit Report, allow users to get a free copy of their credit report from Experian, Equifax, and TransUnion. While all three companies offer one free report yearly, you can opt for them at different intervals during the year for more frequent monitoring.
2. Clear Your Payments
Most lenders look at your debt-to-income ratio to determine eligibility and ensure you have sufficient income to support your purchases. So, before making any big purchase, try maintaining a low credit utilization rate for better approval chances and lower interest rates. The best way to do this is by paying down most or all of your credit card debt several months before applying.
3. One Application at a Time
Most lenders typically steer clear of applications with multiple loans or finances in a short period. They understand that even the slightest of issues in income could lead to a mountain of disasters. Therefore, if you’re looking for quick approval, opt for one big purchase at a time. For instance, don’t buy a car and a house at the same time.
This way, you can also reduce your monthly payments and ease some of the financial burdens off your shoulders.
4. Shop Around
Once you’ve brushed up your credit report and cleared most of your debt, shopping around for the best deal comes next. Rate shopping has become popular in most industries as modern consumers look for the best prices for similar products.
For instance, many car dealerships selling the same makes and models typically offer additional perks or play with the prices to attract buyers. Similarly, lenders offer loans with variable interest rates and terms and conditions. So, ensure you read the fine print when applying for a loan and understand all the legal and financial obligations.
5. Plan the Purchase and Make the Deposit
The purpose of a purchase plan is to find the best time to put the trigger. That time is when you have sufficient savings to make the down payment and a healthy credit report. Moreover, if you’re looking to buy a house, ensure you’ve covered every other aspect of the purchase, such as finding a real estate agent, narrowing down your options, and negotiating with sellers.
Similarly, if you’re purchasing a vehicle, make sure you’ve done your homework to narrow down your options based on your budget, taste, needs, and other factors. Finally, another aspect of the planning phase is to get your documentation in order, such as proof of identity and income, driver’s license, previous purchase information, etc.
Once you have everything ready, you’re all set to proceed with your purchase by making an earnest money deposit that indicates you have made your decision.
Wrapping Up
A good credit score is crucial if you want to save hundreds or even thousands of dollars when buying a car or home or covering any major expense, such as a wedding or business equipment. By understanding the benefits and drawbacks of using credit to make these purchases, you can decide which route to take.
Moreover, with our simple list of tips or steps, you can learn how to prepare for big purchases in no time and lead a path toward getting the best deals in terms of price and interest rate. For more information or advice on credit improvement or purchase planning, speak to a financial expert before taking the leap.
