Another problem with the cruise tickets on credit card plan is that it only works if that is the only thing purchased with the card. Once you fail to pay off the card in full you owe interest on all items charged, from the moment they are charged. To get back to a state of interest free credit card use after failing to pay in full you will need to pay off the entire balance AND not charge anything on it for a month.
JRCSMOM - you may not want to hear this answer, but the best financial decision is not to take the cruise until you have the money set aside to just pay for it in full.
In other words, to your question:
- Is it better to take advantage of the deal carry a balance and then take that $100-$150/month to pay it off or to let the deal pass and continue to save to pay in full? *
The best option is to take the $100-$150/month, set it aside in an untouchable account to save for the cruise (which will take about a year), and THEN, with your cash on hand, wait for the next “50% off the second passenger” special. That requires delayed gratification. However, this is a discretionary cruise, not something like a busted refrigerator or a health care crisis that requires immediate attention.
Honestly, though, if you are that close to the bone that you don’t have this kind of cash on hand, it would be prudent to consider less expensive vacation options. A vacation does not fall under things that should be financed, the way that necessary home repairs or health care crises do.
“If you understand what you are paying and are making a conscious decision to do so, then how is one form of ‘borrowing’ better or worse than another. I don’t say anyone is wrong for opting to make a car payment if that’s what they choose to do and I guarantee the balances on my credit cards are significantly less than what many people are carrying on a car loan.”
A) It’s not whether one form of borrowing is worse than others. It’s what you’re spending it on. Borrowing in order to maintain life’s necessities – a basic car to get to work, unexpected large home repairs, health care – is one thing. Borrowing to go on vacation or do other discretionary things is quite another.
B) It’s not the balances. It’s in the interest rate. If you are thinking that the balance on your credit card with a high APR is somehow “better” than the balance on someone else’s car loan which is much bigger but has a lower APR, then I’m not sure you are fully making educated choices.
With the big ticket items such as a car and a house, although the interest rate is less because you are paying it on a larger amount over a longer time span, the total dollar amount paid is actually many times significantly higher.
If the concern is how much money you’re paying to use money, then my earlier example of paying $72 in interest on $1000 assuming 21% APR and $150/month payments is much less interest than most people pay for ‘big ticket items’. Even at 4.25%, I’m giving the bank a lot more money for my house (even if I do get some back from the government for my interest deduction, the bank still gets the entire amount) than I’m paying for interest on any other single item.
You’d have to have pretty bad credit to get a 29% interest rate even on credit cards, most of mine are less than 20% APR, which is why I used 21% in my examples.
Most credit cards also allow you to ‘float’ expenses for 30 days and interest is not due on items from the moment they are charged.
Of course it’s a bigger savings not to buy things and not to spend the money, but when someone’s refrigerator breaks down, do you recommend they do without until they can save to replace it?
Personally I’d probably be looking for a used on to buy because I have a tendency to be frugal (which makes it especially ironic that I’m the one advocating that debt can be a useful tool), but for many it makes sense to make the purchase immediately knowing that on a $1000 item, they’ll be paying $17.50/month (assuming 21% APR) in interest.
For most, paying $17.50 beats living a month without a refrigerator, and for those with low incomes, assuming that all they can do is make minimum payments for a year until they get their tax money in, $17.50/month in interest beats the prices they’d pay at a rent-to-own place every time…
Now, yes there is an issue with people who have ever increasing balances because they aren’t using the debt to manage necessary or strategic purchases and are continuing to make additional purchases when carrying a balance and then spiral out of control…
But to go back to the above example of needing to replace a refrigerator. For someone that pays $265/month and breaks the payment into approximately 4 equal payments, they will pay less than $50 in interest (actually less than $45). How can you choose to judge them any differently than someone that buys a refrigerator that costs $50 more.
“Of course it’s a bigger savings not to buy things and not to spend the money, but when someone’s refrigerator breaks down, do you recommend they do without until they can save to fix it?”
Of course not, as I indicated above in both my posts about unexpected household repairs. I think everyone on here is in explicit agreement that everyone needs a working refrigerator (etc) and if that entails using credit to make it necessary, that’s unavoidable and that’s the way the cookie crumbles. However, breaking out of the debt cycle is really the only way to get ahead.
"Personally I’d probably be looking for a used on to buy because I have a tendency to be frugal (which makes it especially ironic that I’m the one advocating that debt can be a useful tool), but for many it makes sense to make the purchase immediately knowing that on a $1000 item, they’ll be paying $17.50/month (assuming 21% APR) in interest.
For most, paying $17.50 beats living a month without a refrigerator, and for those with low incomes, assuming that all they can do is make minimum payments for a year until they get their tax money in, $17.50/month in interest beats the prices they’d pay at a rent-to-own place every time…"
I get that many people are living hand-to-mouth enough that they wouldn’t have the cash on hand for a necessary $1000 refrigerator. I just spent the weekend in the neighborhood I grew up in, which is let’s say just rather scruffy these days and leave it at that. I GET it and there’s no shame in not being immediately able to have that cash on hand, that’s how life goes sometimes. But then those same people are foolish if they are engaging in significant discretionary spending and thinking that it’s ok because they’ve gotten a deal. They need to delay their gratification and build up cash reserves more than they need to take vacations.
My CC company called today and asked if we were making purchases in NYC. I said no. If we use our cards out of state I usually let them know about it ahead of time.
They are sending out cards with new numbers.
I wonder if the bank would call you if that happened with your debit card?
Our bank did notify my S when there were some suspicious charges on his debit card. He had to sign a paper stating they were not his charges and they sent him a new card. This was when he was in college. He now uses his Amazon credit card for everything he can. (And he has the full balance automatically deducted from his checking account every month. He keeps way too much cash in his checking account, earning very little interest. I’m working on him to invest some.)
Edit after reading the comment below - this was PNC that notified him of fradulent debit card charges.
Purely anecdotal but I had to pull out cash in Costa Rica a few times when I went there in 2011. I used a PNC debit card and completely forgot to tell them I was traveling abroad. Never got denied at the ATMs and was never alerted that I was using a card out of the country.
I don’t have pnc accounts anymore.
Did you use the card to buy your airplane ticket? The last 2 times a family member or I have traveled abroad, when I called the CC company to let them know charges would be made abroad, they already had it on record. I thought my spouse had called beforehand. Nope. They knew about it because I purchased tickets on the same card. Kind of creepy but effective.
@doschicos nope. Credit card. I use credit cards for virtually everything and have since high school. That’s why I forgot to call and tell pnc that I’d be out of the country. Told the CC companies.
I’m astounded when people do things like putting vacations on a credit card when they can’t pay in full. Here’s what we did when we couldn’t afford to come up with the cash fo a vacation. We didn’t go. Period. End of story.
Indeed for 10 years we didn’t take any vacations instead socking our money away for college, general savings and retirement.
@romanigypsyeyes, it may not matter with regard to how you feel, but the atm knows that someone actually possessed the card to do the transaction. Most of the time when I’ve been called, it was for a transaction where only cc number was used.
The single exception was the first time DW went Christmas shopping at a large suburban mall. Got the call that asked if someone had really used the card something like 12 times in the past 3 hours.
If my card is being used in a foreign country and the bank didn’t know it was me, you can bet your butt I’d want to be alerted.
@jrcsmom, one of the things I value about CC is that people call it like it is. We don’t tell the 2.5 GPA kid that he should apply to Harvard and we tell the 4.0 kid he still isn’t a shoo-in.
With that in mind, please take this in the spirit in which it is intended - helping you.
You said earlier “And I acknowledge that comes with a higher APR, but I choose to make educated choices about when I choose to use that debt and how long I choose to carry a balance. I understand my finances well enough to decide when it’s in my best interest to pay $20 to use the banks money for a month.”
I have to ask what source you are getting this education from. Because there is no source - whether it’s Dave Ramsey, Suze Orman or the like, or a credit counselor or financial adviser - who would say that someone who doesn’t have $1500 on hand should be planning to take a $1500 vacation. Even if you can get a deal on passenger number 2.
If you are dead set on the vacation, then the only smart way to do it is to save the cash each month and then go on it - not finance it. Financing / paying interest is almost never a good idea for a completely optional / discretionary purchase. Credit card debt is a Bad Thing and should be reserved for needs (new transmission to get to work, new refrigerator when the old one breaks, health care).
However. I am willing to bet most of them would also say that as close to the bone as you are - a single mother, already with credit card debt, and for whom $109-150 a month is a big deal - you shouldn’t be spending $1200-1500 on a vaca in the first place. You should be building up your cash reserves so you don’t have to resort to credit next time you need a new transmission, and you should be working on a plan to pay off your existing cc debt.
CC debt is evil. You’re thinking like a poor person - oh, I’d like a vaca, I can just finance it, it’s only a few dollars and it’s less than my car note. No. That will keep you poor. Rich people get rich by doing smart things with their money. And even rich people get poor by spending more than the cash they have on hand. I know; I’m cleaning up after a relative who went from 7 figures in the bank to $63k in cc debt. Because they thought that it was somehow “clever” or “smart” to have cc debt.
I would hate to see something bad happen to you. I really urge you to get out of the mindset that “I can always finance it”. And I urge you to distinguish between needs and wants. Best of wishes.
“Rich people get rich by doing smart things with their money.”
That means saving and getting out of debt, building emergency funds, then learning to invest.
Know what feels better than a cruise? Retiring debt and building an emergency fund. It’s much more restful than sea air believe me.
My opinion on this is you shouldn’t be buying a $1000 refrigerator if you have to “make minimum payments for a year until they get their tax money in.”
That’s how poor people think, and that’s why they stay poor.
Three questions were asked by jrcs:
“How about your home? Did you save and pay cash for it or did you decide what a reasonable interest rate was on a loan so that you could buy a home before you had the cash saved?”
–All comes down to income. Having living quarters is a necessity. You need a roof over your head. You can rent or buy. One is not necessarily better than the other these days depending on circumstances. Having home mortgage is a necessary debt because the cost is too high for most. But that does not mean you need the biggest house on the block. You have to comfortably make the payments. Banks aren’t very forgiving when you miss payments. Shop for interest rates. It’s a big purchase.
Saving a substantial down payment prior buying saves a ton of costs and cash. Financing over 15 years vs 30 is big. Many variables. Insurance. Taxes. Maintenance.
Homes are put in the positive net worth column (an asset) on a financial statement.
(Yes, we didn’t buy over the years due to high interest rates and we’ve paid with cash too).
“Of course it’s a bigger savings not to buy things and not to spend the money, but when someone’s refrigerator breaks down, do you recommend they do without until they can save to replace it?”
—That is why emergency funds exist. “Emergencies” don’t need to be emergencies. “Be Prepared” is a good motto. You save BEFORE it happens, not after. You know appliances will need fixing/replaced, the car will need repair, etc. No surprise. Stuff happens. All the time. Get ready for it. Go to the emergency fund, pay for it and move on. Pat yourself on the back for being so forward thinking. Rebuild the fund.
Life does not need to be lived crisis to crisis on credit debt.
Cars? Easy, pay with cash.
With respect to houses, most people either have to rent the house or rent the money to buy the house. So borrowing for a house substitutes one rental cost for another, rather than adding a purely optional cost like a vacation.
That’s not the most important thing jrcsmom needs to absorb right now, though. Let’s stay with the advice she needs to internalize to help her make smarter, more prudent financial decisions. Which starts with building a cash cushion for expenses in case the transmission breaks or the refrigerator goes out, and then quickly moving to pay off her cc debt which is a chain around her neck. Not a discretionary vacation.