Unexpected Expense? How a Credit Card Installment Plan Can Help

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Just as you’re settling into a new work-from-home life, your laptop dies. Or COVID-induced loads of laundry overwhelm your washing machine. Or the hot water heater decides it is fed up with all the extra dishes and calls it quits.

That’s when the offer arrives: Your credit card company says you can put your purchase on an installment plan.

Some credit card issuers have joined the installment game in the past few years, trying to compete with the likes of buy-now-pay-later services Afterpay and Affirm.

American Express offers a Plan It program, Citibank has a Flex Pay option and Chase has announced its My Chase Plan, which will be available later this year, according to an email from Chase Communications Manager Vice President Thomas Doelp.

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The plans work like this: After you make a purchase, you can choose to put that amount on an installment plan. You’ll select how long you want to stretch out the payments — typically from three to 24 months — with monthly payments that include a set interest rate or fees.

But is an installment plan your best financial move to pay for a larger purchase? We’ll help you decide.

Should You Use a Credit Card Installment Plan?

An installment plan is available to customers regardless of their situation and does not affect your obligations to pay the rest of your credit card balance. It’s installment credit for a single purchase — although you can choose multiple one-time purchases (more on that later).

Here’s how to decide if an installment plan is a good fit for you.

What You Need to Ask Before Using an Installment Plan

When a credit card company offers you services — like personal loans or convenience checks — they all have the same goal: Getting you to use the credit card more often so they in turn can earn more money.

Knowing this information going forward can help you make an informed decision about whether an installment plan is the best financial choice for you.

To help you decide, ask the following questions:

  • Is there a minimum purchase requirement? If your purchase doesn’t meet the minimum amount, don’t spend unnecessarily just to meet the requirements.
  • What are the fees or interest rate? Regardless of whether your issuer calls it a fee or an interest rate, you should compare the amounts and total price you’ll pay at the end of the installment period with other payment options.
  • How does this affect my credit utilization? If you’re considering putting an extra-large amount on a payment plan, you’re still using your revolving credit line. That sudden addition could affect your credit utilization ratio and thus could lower your credit score.
  • What are the penalties if you make a late payment or close the account? If your financial situation takes a turn for the worse, you should know ahead of time how much you could potentially owe.
  • Can you earn points with your purchase? If you depend on credit card purchases to help you earn points for gift cards or get cash back, find out if your installment payments count toward your total.
  • How does this compare to my other options? Is a personal loan a better option for your situation? While loans involve applications and credit checks, accepting an installment plan pretty much requires the click of a couple buttons. On the positive side, an installment plan purchase doesn’t produce a hard inquiry, which could affect your credit score. But if you need money for multiple purchases, a single loan payment might be easier to incorporate into your budget.

Should You Use a Credit Card Installment Plan?

As an example of installment plan options, let’s take a look at an offer I received from my card issuer, Citibank, for a recent purchase of $293. It offered the following monthly payment options, which would be added to my regular total monthly payment:

  1. 3 monthly payments of $99. Total estimated interest: $2.93 for a total payment of $297.

  2. 6 monthly payments of $50. Total estimated interest: $5.14 for a total payment of $300.

  3. 9 monthly payments of $34. Total estimated interest: $7.36 for a total payment of $306.

All of these seem like relatively good deals, especially when you consider my regular interest rate is 19.99%, which would have racked up $58.57 of interest in just one month.

In the example above, I used a single purchase. If you have one unexpected or large expense and you pay off the rest of your credit card balance each month, this could be a good deal compared to your other options. The set installments offer a reliable payment schedule that you can incorporate into your monthly budget.

However, your current budget could change drastically if your employment situation changes suddenly. Taking on any additional expenses could be disastrous if you don’t already have the money to cover the payments, advised Certified Financial Planner Amy Irvine with Rooted Financial Planning.

“Plan for the worst case scenario,” she said. “Know the answer to the question: ‘If I lose my job, how much am I going to have for this payment?””

And our test case assumed you have only one unexpected expense — and that you won’t “forget” the purchase and see the available credit as a pass to put additional purchases on the credit card.

Most issuers will allow you to set up multiple plans, which means your monthly payment could begin to balloon as you pay each installment. If you already carry a balance and make the minimum payment, this installment payment is added to your minimum, which means you need to budget for a larger minimum monthly payment.

To go back to our example, if I had three purchases of the same amount that I put on six-month installment plans, I’d be paying an extra $150 a month — in addition to the payment for the balance on my credit card.

And if that one-time expense was bigger — like a few thousand dollars — a single purchase’s monthly payment could climb into the hundreds.

Given many lenders’ responses to the pandemic, first consider other funds that you could divert toward the expense, Irvine advised.

“If it happened right now, in today’s environment, do they have other loans that they could push into forbearance?” she asked, citing federal student loans as an example. “Could we take advantage of the fact that your cash flow could go toward this payment the next few months?”

And if the expense is truly a necessary one, consider switching to a barebones budget to free up extra money or decide if this is the time to dip into your emergency fund.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.