Credit cards are an essential part of modern financial life, offering convenience and rewards to many card users. One of the newer features many card issuers provide is a ‘pay-over-time’ option, which can be useful for large purchases.
However, like all financial tools, this option must be used wisely to avoid unnecessary debt and fees. Let’s dive deeper into what pay-over-time credit card plans are, how they work, and when it makes sense to use them for your purchases.
What is pay-over-time?
The pay-over-time feature is a flexible payment option provided by many credit card issuers. It allows cardholders to pay for large purchases in installments over a period rather than paying the full amount on their next billing cycle. This can be particularly useful for those who need to manage their cash flow or for unexpected expenses that require spreading payments over several months.
The main benefit of using pay-over-time is that it can be cheaper than making payments on your credit card and being charged the standard interest rate.
How do pay-over-time plans work?
Typically, once a cardholder makes a purchase that qualifies for a pay-over-time plan, they can choose to convert it into an installment plan through their credit card’s online portal or mobile app. The terms, such as the length of the plan and the interest rate or fees, are usually disclosed at this stage.
For example, if you purchase a new laptop for $1,000, your credit card issuer may offer you the option to pay it over six months at 0% interest after paying a small financing fee which can either be a one-time fee or an ongoing monthly fee. This means that instead of paying $1,000 on your next bill to enjoy an interest-fee repayment, you might pay around $170 each month (aside from the initial or monthly fee) until the debt is cleared.
Chase is one bank that not only offers competitive credit cards but also has a pay-over-time feature that can accommodate most people’s purchases large or small. Your purchase only needs to be at least $100 to qualify for a payment plan and you’ll get three to 24 months to repay the purchase under your plan. Each plan has fixed monthly payments, which include the interest charge on pay-over-time purchases, and there are no penalties to pay off your purchase earlier.
How do pay-over-time options compare to traditional interest charges?
Pay-over-time options can be a good alternative to traditional revolving credit charges, especially if you often carry a balance. Here’s how they compare:
- Interest rates: The interest rates on pay-over-time plans tend to be lower than standard credit card APRs, which can sometimes exceed 20%. However, the rates for these plans may still be higher than personal loans or other financing options.
- Transparency: With a traditional credit card balance, the amount of interest you owe can fluctuate depending on how much of the balance you pay each month and if you have a variable APR. With pay-over-time, you get a clearer picture of how much you owe, since the payment amounts are fixed.
- Impact on credit: Pay-over-time options typically won’t negatively impact your credit score as long as you make your payments on time. However, if you choose to revolve a balance instead of paying off the plan within the set period, it could lead to higher interest charges and debt accumulation.
However, it’s important to compare the overall cost, since you don’t want to choose a plan with fees that make it more expensive than simply carrying a balance at a standard interest rate.
Pros and cons of credit card pay-over-time options
Before using a pay-over-time option, be sure to weigh the benefits and drawbacks. While it’s nice to have the option to avoid high interest fees on your larger purchases, using these plans can also encourage you to not pay your credit card balances in full each month which is a common best practice.
Pros:
- Budget management: Spreading payments over time can ease monthly budgeting and avoid significant hits to your cash flow.
- Predictability: Fixed payments help in planning and avoiding fluctuations associated with variable interest rates.
- Flexibility: Offers flexibility to tackle unexpected expenses without draining emergency funds.
Cons:
- Additional costs: Plans often include fees or interest, which can make purchases more expensive in the long run.
- Potential for increased debt: If not managed carefully, using pay-over-time can lead to accumulating more debt.
- Limited eligibility: Not all purchases may qualify, and terms can vary significantly between issuers.
When should you consider using pay-over-time options?
Pay-over-time credit card options can be beneficial in specific situations, such as:
- Large, planned purchases: If you need to make an essential purchase (like a home appliance or car repair) and don’t have the funds to pay it off immediately, this option can ease the financial strain.
- Emergency expenses: Unexpected medical bills or urgent repairs might be best handled with a pay-over-time plan to lift some of the immediate financial pressure. Even if you only need two to three months to gather the finances to pay off the expense, utilizing a pay-over-time payment option can help you save some money on interest.
- Cash flow management: If cash flow is temporarily tight, using this option for necessary expenses can avoid depleting savings or investments.
However, it’s important to avoid using this option for everyday purchases or to justify overspending. Pay-over-time is not a solution for poor budgeting, and using it irresponsibly can lead to long-term debt.
Plus, paying any interest or fees on your credit card purchases will only cancel out any rewards you earn from purchases and increase your overall costs of holding the card especially if you’re already paying an annual fee.
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Tips for maximizing the benefits of pay-over-time credit card plans
To maximize the benefits of credit card pay-over-time plans, you’ll want to use them wisely and sparingly.
Read the fine print before opting into a pay-over-time plan. Make sure you fully understand the repayment timeline, interest rate, fees, and the total cost of the purchase. If your card issuer offers both fee-based and interest-based plans, calculate which option will cost you less overall.
Even though these plans offer flexibility, it’s important to stay within your financial limits. Create a budget that includes the monthly payments and ensure that you can meet these obligations without stretching yourself too thin. Remember that missing payments could lead to additional fees or damage to your credit score so consider setting up automatic monthly credit card payments.
Does pay-over-time affect credit score?
It’s important to be mindful of how these plans may affect your total credit utilization, and therefore your credit score. While pay-over-time plans can help you manage large purchases, the full purchase amount may still be factored into your credit utilization ratio. High utilization (using more than 30% of your available credit) can negatively impact your credit score so it all depends on how high the balances are that you carry compared to your total credit limit. Keep an eye on your overall credit usage, and aim to keep it as low as possible.
Are pay-over-time options better than buy now, pay later services?
The pay-over-time feature and buy now, pay later (BNPL) services are both designed to offer more flexibility in managing expenses. However, they work differently and have their own advantages and disadvantages.
BNPL services are offered by independent companies or retailers. They allow you to split payments into smaller installments at the time of your purchase. But sometimes, these programs are limited to a specific retailer or purchase.
For example, if you decided to buy some health and wellness products from a company’s website and your total came out to $250, you may be offered to split the payment up during the checkout process using a third-party BNPL company like AfterPay or Klarna. The plan may include fees or interest charges, or it could have no fees. However, the plan may or may not require a credit check or eligibility criteria to qualify you for the plan.
Pay-over-time is basically the BNPL credit card option since it’s mainly offered through credit card issuers and serves a similar purpose by allowing you to break up your payments for certain purchases. But, the criteria is not based on a specific retailer or type of purchase. Instead, you only need to meet the minimum purchasing amount requirement.
These plans don’t require an additional credit check since it’s operated through your credit card company, but they may include fees or interest charges.
Bottom line on pay-over-time credit card plans
Pay-over-time credit card plans can be a valuable tool when used strategically. By understanding the ins and outs of these plans, you can make informed decisions that help you manage your credit card spending effectively.
Keep in mind that the best way to avoid interest fees and credit card debt is to pay your bill off in full each month. Consider your financial situation and goals before opting for this payment method though, and always read the fine print to make sure you understand the fees and charges.
