To better understand how using credit appropriately can work in practice, let’s look at a hypothetical scenario.
Robert has just finished relocating his family to a new station. The problem is, because his family’s previous residence was furnished and their new one is not, they need new furniture. Even though Robert has credit available to him, whenever possible, he prefers to save in advance for purchases and pay cash. However, in this case, miscellaneous expenses associated with moving have depleted what he had in savings.
Robert considers his options:
Credit Card Option – Robert has a credit card with an available balance that should be enough to cover the cost of the furniture. However, he is already carrying a balance on his card and would prefer to continue paying that down, rather than adding to it. Also, he’s had credit cards in the past whose rates increased unexpectedly, and he’s concerned about suddenly paying higher interest on a large balance. Finally, he’s planning to finance a new car purchase next year and is concerned that ‘maxing out’ his credit card balance now could hurt his credit score later when he applies for a car loan.
Rent-to-Own Option – Robert considers a rent-to-own option. He likes the idea that he could get the furniture immediately without using his credit card and, as it turns out, the rent-to-own store in his neighborhood has a furniture set that would suit his family’s needs. The price is $115 a month for 18 months, which is within his budget. However, with further shopping, he finds the same set of furniture at another store for just over $1000. He does the math and determines that, effectively, he would be paying over 100% APR to purchase the furniture from the rent-to-own store.
Community Bank Loan Option – Robert has recently opened a Checking Account at his local Community Bank and learned that Community Bank offers unsecured Signature Loans with low, fixed rates for amounts starting at $1000. This sounds ideal for his needs, so he applies online through the website and receives immediate approval. Robert uses the loan to buy the furniture set from the second store for just over $1000. Now, his family has the furniture they need, Robert still has credit available on his card, in case of emergencies, and he’s building a positive credit profile that should make credit even more affordable for him in the future.
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