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How Will Using My Credit Card for Large Purchases Affect My Credit?

Dear Experian,

If I have an introductory zero-interest window on a new credit card (15 months), and I use that card to pay off a home renovation – will carrying the balance for 14 months and then paying the card off in full damage my credit score? The home renovation balance is ~50% of that card’s limit. That card constitutes ~35% of my overall available credit, but I don’t carry balances on any other cards. Should I just pay off the home renovation balance now?

– HCY

Dear HCY,

Using your credit card for a large purchase, such as paying off the home renovation with a credit card will certainly increase your utilization rate, which will at least initially ding your credit scores. Utilization is the second most important factor in credit scores, right behind payment history. But, there is more to consider.

Whether to use your new credit card to carry the balance or use available cash to pay it off now really depends on your current financial situation and credit goals. If you are able to do so comfortably, paying the debt in full now may be the simplest option, although there may be other considerations.

You didn’t say whether you currently have an outstanding loan for the amount of the renovation or if the balance is on another credit card, but you did indicate that you have the means to pay the debt off right away, rather than waiting.

If you took out a loan to pay for your home renovation, paying the loan off now will save you in interest fees, assuming there are no early repayment penalties. However, if the loan was opened recently and you are trying to build your credit history, continuing to pay on the loan for a while longer may be beneficial for your credit scores.

Impact of a Large Credit Card Purchase on Credit Utilization

Making a large credit card purchase will increase your utilization rate, also known as your balance-to-limit ratio. Your utilization rate is calculated by adding up the total of all your balances on credit cards and dividing it by the total of all your credit card limits.

The general rule of thumb is that you should stay below a 30 percent utilization rate. The lower your utilization rate, the better for your credit scores.

While it is possible that using 50% of the available balance on your new credit card will have some negative effect on your credit scores, any effect would be temporary and would lessen as you continue to pay down the balance.

Weighing Financial Benefits against an Increase in Credit Utilization

There may be financial benefits to paying the debt off slowly rather than all at once. For example, some credit cards offer rewards programs that issue “points” for every dollar you spend on the card. If your new credit card offers such rewards, then transferring a large balance to that card can help you accumulate points that can then be used for other benefits, such as travel expenses.

If you feel it would beneficial in your financial situation to use the interest-free period on your card to pay the balance off slowly, but are concerned about a potential dip in credit scores due to an increase in credit utilization, consider whether you will be applying for credit in the near future.

If you are not planning to make any major purchases on credit until after the balance is paid off, a temporary dip in credit scores may not be a deal-breaker. Once paid in full, your account will be updated accordingly, and your credit scores will reflect that the balance on the account is now zero.

Remember that the introductory rate is only temporary. If you don’t pay the balance in full by the end of that period, you may be stuck with very high interest, which could cost you far more than just paying for the renovation outright if you have the resources to do so.

Check Your Credit Card Agreement to Find Out If You Can Do What You Plan

Understand what the credit card contract says before you make a purchase, especially for something like home renovation. There may be restrictions on how you use the card for money transfers or large credit items like a car or house.

Failure to understand the terms of your credit card contract could result in much higher interest rates, interest rates being applied immediately rather than at the end of the introductory period or declination of the charges.

Thank you for asking,
The “Ask Experian” Team

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