Those of us who have a credit card have at some point been in the same situation: we arrive at the checkout and when we swipe the card we are asked how many instalments we want to defer our purchase. At some point we were told that whenever there is a instalment we would not pay interest and that this would be the ideal term but how can we be sure that this is the case?
Myths and Realities of Paying a Fee
Let’s start with something that most of us can agree on: deferring our purchases to a quota is ideal because it doesn’t generate interest. In fact, if we also know the difference between the cut-off date and the payment date of our credit cards, we could defer our purchases for a fee and pay them up to 45 days also free of interest.
Among the most common reasons to pay a fee for our purchases with the credit card is the fact of earning points, miles or kilometers without having to pay more for our consumption; however, we have reviewed before to what extent this strategy can become more a myth than a benefit.
Make sure to read also Credit Cards for no credit which provides a step by step guide how to open a credit card even if you have no credit at all.
Now, if we have no greater expectation of what we can earn in points for deferring a purchase to a fee and the only benefit we expect will be not to pay interest, there would only be one reason – financially speaking – to pay with our credit card and not with cash (or debit card):
The money we were going to use paying for that purchase we can use it in something else. In doing so, we will receive some kind of profit or profit in the next month and we will have it back to pay our credit card statement on the payment date.
Unfortunately, it’s common that instead of using the money in something that guarantees we’ll have it back to pay the credit card and get a benefit for using it in that month, we end up spending it on something different. In this case, the only thing we will do is make our next month’s self pay with that month’s money for a consumption of the past (which we should have paid with our cash).
Is it okay to pay several installments?
Like many things in personal finance, it’s neither right nor wrong. Everything depends on the level of consciousness with which we make our purchase and the expectations we have to enjoy it.
Why would someone pay for a credit card purchase in several installments?
There are basically two reasons why a person might consider deferring purchases with their credit cards to several installments:
- You want or need a product or service, you don’t have the money to pay for it with cash and you can’t wait to save it to buy it.
- Paying for the product or service with cash would mean running out of money to meet other obligations, so you prefer to pay in several installments and not affect your liquidity in the short term.
What is the logic behind choosing the number of installments to defer a purchase?
Deferring a purchase to several installments allows us to make small monthly payments that reduce the risk of running out of money in a month. In this sense, the more installments I choose, the lower the payments I have to make monthly and the higher the cash flow I have month to month.
However, we must not forget that in the case of a credit card, the fees are only one element of all that we have to consider in the purchase. The second key element is the interest rate; the third is the durability of the good or service we are buying.
When we have these three elements present we can have enough information to make the best decision. The principles we should follow at this point would be:
- A product or service should not be paid for longer than it takes to enjoy or consume it.
- Choosing more fees decreases the value we pay for each fee, but also increases the value we pay for interest. There is a number of fees after which the credit becomes more expensive than the fee decreases; that will be the limit number of fees we should keep in mind. Beyond this, there are very few reasons – financially speaking – to defer a purchase.
Steps to choosing the number of installments in a purchase
With all of the above clear, we recommend the following steps to know how many instalments you should defer your purchases:
- If it is a product or service that you are going to consume in less than a month (market, food, party, public transport, etc.) pay it with cash.
- If you want to earn your credit card points by paying a fee, be sure to save the money you would have used that same month if you didn’t have your credit card. Otherwise, you’re making next month’s me have to decomplete its income to cover your past consumption.
- If you don’t earn points for your credit card purchases, you have the money to buy the good or service without having to swipe your credit card, and you have nothing better to do with that money in a month, pay for your purchase with that money and save the credit card.
- If you are going to defer it in installments, ask yourself what is your expectation of the useful life of the product or service you are going to acquire. For example, if you buy clothes, you could expect to use them for at least a year; if you buy a TV, you could expect to have them for at least three years.
- Keep in mind the amount of credit you need and the interest rate charged on your credit card. At this point, if you’re going to buy all the appliances in your home, you might prefer a free-investment loan rather than your card.
- Make a quick count of the interest you’d end up paying by deferring your purchase to the number of installments you’re thinking about (below you’ll find a calculator that does just that).
- Ask yourself if you’re willing to assume that cost for the item you’re about to buy. In other words, if the benefit of having it now and paying it in installments with interest is greater than the value of the latter.
- Make a decision!