Can you cover a $400 unexpected expense with your savings right now? If you’re like nearly half of all Americans, probably not. Facing an emergency, most people must use other means—usually a credit card—to pay for a necessary car repair or replacement refrigerator.
However, some credit card options are better than others. Instead of charging on your regular credit card and paying an average of 14% in interest, there are some cards that can eliminate or reduce the interest you pay on that big purchase or make it easier to affordably budget the payments. Here are three options and the pros and cons of each.
1. Plan It by American Express:
A new feature from the issuer, Plan It allows cardholders to pay a purchase in installments. Cardholders select an eligible purchase on the Amex mobile app and the issuer will show up to three installment plans with different durations and monthly payments, including a finance fee (but no APR). You pick one and its payment is automatically added to your monthly minimum payment. Purchases of $100 are eligible for cardholders in good standing.
Pros: Because you can get multiple plan options, you can find one that fits your budget best. Because the minimum payment includes your installment, it’s easy to stay on budget and pay off the purchase within a specific timeframe. The finance charge is less or equal to what you would pay if you paid off the purchase regularly over the same number of months, according to an Amex spokeswoman, so you’re not paying extra for the convenience of an installment plan.
Cons: You don’t get the installment plan options until you make a purchase. If you don’t like your options—which can be as few as one—you’re out of luck. The plans also can’t be changed once selected. Because of that commitment, you might lose some flexibility to adjust to changing circumstances should you opt for an installment plan amount that’s higher than the minimum monthly payment you’d pay on the account without the plan.
Who should use this option: Those who want the discipline imposed by a payoff schedule, but who also have the financial ability to regularly meet the higher, monthly payments.
2. Store credit card:
Many retailers provide short- to medium-term financing through their store credit cards. (Shopper tip: Walmart offers no-interest financing through its credit card.) You are offered a set period, such as six months to 24 months, to pay off a specific purchase. If you pay off the balance in the given period, you pay no interest on the purchase. But if you don’t, you end up paying the interest retroactively for all the months you carried a balance.
Pros: Convenience is a big factor because the financing is right there when you make the purchase. Store credit cards often are easier to qualify for because of their lower credit limits.
Cons: You could end up with a heftier bill if you don’t pay off the balance before the deferred-interest period ends. Over a third of those with this kind of plan, and who made additional purchases beyond the one made when they received the card, paid more than 150% of the original amount, according to a 2015 study from the Consumer Financial Protection Bureau. Another blow: The interest on these cards are typically much higher than other credit cards, with APRs that are typically in the mid-20s.
Who should use this option: “These plans can be good deal as long as cardholders understand what they’re getting into,” says Robert Harrow, credit card analyst at ValuePenguin. If you can keep track of when the deferred-interest period expires and how much you need to pay each month to eliminate the balance, this option may work for you. Just remember: Paying the minimum payment may not be enough to pay off the balance in time.
3. No-interest card:
These credit cards come with an introductory, 0% (or very low) interest rate for a fixed period, ranging from six months to 18 months, depending on the card and your qualifications. That means any purchases won’t amass interest for that period. After that, any remaining balance starts to accrue interest.
Pros: You won’t be charged any retroactive interest on any remaining balance after the no-interest period ends. That makes it a safer bet than a retail credit card. These often come with larger credit limits, which will help your credit score.
Cons: There are still drawbacks. If you don’t pay off the remaining balance, interest will kick in, making your initial purchase more expensive. Because these cards typically have larger credit limits, you may be tempted to buy more than you should. Using such a card also takes some pre-planning: You need to research, apply and receive the card before making the big purchase. During an emergency, you may not have that time for that process.
Who should use it: Using one of these credit cards “is still by far the best option for consumers who must depend on credit for a large purchase,” says Harrow. “It has the least amount of strings, and fees, attached to it.” With that said, it’s wise to commit to a self-directed payoff schedule, and to avoid the temptation to buy more on the card.