For a long time, people have relied on credit cards to help with the handling of major expenses. The idea is simply to put a large payment on a credit card and pay it back in chunks as efficiently as possible. This remains a viable option in many cases, but for some it is likely becoming less appealing. With higher credit card fees among some of the trends shaping the future of credit, the notion of relying on this option for large payments can be somewhat off-putting.
So, for those who are less than enthusiastic about the future of credit cards — or who simply want additional options — what are some alternative ways to handle large payments? Depending on the nature of those payments (as in, what they’re for) there can be quite a few! But four common options come to mind first.
The personal loan versus credit card debate is a common one, but will be newly relevant to those who wish to stop using credit cards to handle large payments. Generally speaking, there are pros and cons to both options, but support for the personal loan option comes from two primary perks. Typically, a personal loan comes with lower interest and a steadier and more predictable repayment plan. The “con” is that a personal loan is a little more involved than a credit card swipe, and therefore can’t be used as frequently. But for a given large payment, this can definitely be a useful option.
It may not be a good idea to make a habit out of cleaning out your savings account. If you have such an account however, and you haven’t touched it in years (as is the case for many), you might just have the funds to cover most or all of a large payment. Something like a down payment on an apartment for instance, or an unexpected car repair might be manageable via a few hundred dollars you have standing by that you’ve largely forgotten about. The downside is that money you take out of savings stops accruing interest, and you’ll have to gradually build the account back up again. But it’s certainly appealing to some to address payments this way and avoid the need to make payments or settle debt.
Retirement Fund Withdrawals
If there’s a particularly urgent expense and you don’t want to use a credit card, dipping into your retirement fund is also an option to consider. To be clear, this isn’t something that should be done lightly. Allowing as much money as possible to mature for your retirement is important, and in some cases pulling any out comes with a burden as well. With any kind of retirement fund in the U.S. or elsewhere, you’ll lose the power of compounding interest on the money you take out. And withdrawing your RRSP early in Canada essentially counts as income (meaning you have to pay taxes on what you draw). Despite these negatives however, this can strictly speaking be a means of securing funds to handle a payment without having to pay down any loan or credit card debt. Just be sure you weigh the pros and cons appropriately.
Financing Through Merchants
Depending on where you’re making a large payment, you may also now have the option of financing it through the merchant. This has become a far more common option thanks to the emergence of lending startups (such as Afterpay, Klarna, ZipPay, etc.) that basically break down payments into installments. Specific arrangements vary from one service to the next, but basically, these startups have made it easier for merchants to sell goods or services at full price without needing the full payment up front. The schedule of payments is typically fairly tight (say, four installments over eight weeks), so it may not be the best option if you need significant time to come up with the funds. But to offset a larger expense just a little bit, it can certainly be a helpful service.
Ultimately, credit cards should not be discounted completely. In many cases they still make for the most sensible options. For those who are wary of fees however, or even less-than-ideal interest rates, it can’t hurt to have a few other ideas in mind. In the right circumstances, any of the above might just be the right way to handle an expense.