As autumn winds turn into snow flurries, thoughts of the coming holiday season become harder to put off. As exciting as it is that the recession is abating, many consumers will still need to borrow to make the season bright. But what about the negative implication of using credit? Does the option of layaway provide a more fiscally responsible way of buying for the holidays? Here we’ll look at the impact layaway may have on your credit score.
Why you might choose layaway
Layaway began during the Great Depression just prior to WWII. Retail stores offered the service to give people a chance to buy the things they needed when they didn’t have the cash in hand. A customer’s layaway purchases would be removed from the floor until it’s been paid in full. Miss a payment or cancel the plan and the merchandise is put back on the floor and payment is refunded minus any fees or charges the retailer imposes, as listed in the agreement.
When credit cards became accessible to people, regardless of their economic status, the popularity of layaway waned. But with the tightening of credit for low-income households and those who are over their head in debt, layaway is making a comeback with more and more retailers offering layaway payment programs.
The main reason for choosing to buy on layaway is to be able to make purchases and pay over time. It’s a good option for those who struggle to save up a lump sum in cash to pay for their holiday gifts. However, the program requires a commitment of paying every week or two, which is more of a hassle then making a monthly credit card payment but a great work around for people who can’t qualify for a credit card.
How credit cards may hurt your score
Many people are tempted by low and 0% credit card promotions offered during the holiday shopping season. While the deals are enticing, they also provide easy access to a great deal of debt. One of the most important factors used in calculating your credit score is the amount of outstanding credit card debt, comprising 30% of your score. Using credit cards is a fast and easy way to overspend and see your credit score dive from an excessive amount of debt.
How layaway may protect your credit score
First, we need to denounce the idea that layaway can build up your credit score. Since layaway is a cash-only transaction, you aren’t establishing a new line of credit or using an existing credit card, activities that are reported to the credit reporting bureaus. In other words, layaway purchases by pass the oversight agencies that rate your credit worthiness. Layaway will help by preventing more debt from being reported to the credit reporting bureaus.
The second factor that may protect your credit score is the lack of credit inquiries. This is when a lender requests to see your credit reports to determine your eligibility. Too many inquiries may be considered a sign of financial trouble, resulting in a drop in your score. So pass on that 10% discount offered by the store clerk for opening a new credit card account; it’s just not worth the risk to your score.
By using a layaway plan, impulse spending will be curtailed, mimicking the effect of saving money, as opposed to having a large amount of unused credit that has the opposite effect. Retailers who offer layaway typically charge an administrative fee for the privilege of using the service, but the fee is often much less than the interest that would be paid with a credit card.
In conclusion, saving up for your shopping is the best way. But for times when you just can’t scrape up a lump sum of cold hard cash, layaway is a wise choice. Using cash for your shopping via layaway, instead of relying on a credit card, can help you to maintain your current credit score. It alleviates the worry and stress that comes with managing a credit card, while allowing you to reserve the items you want to be picked up when you’re able to pay the full balance.
About the Author: Noreen Ruth is a regular contributor to ASAPCreditCard.com and a variety of financial-related blogs and websites. Click here to compare a wide selection of credit card offers, or follow her additional posts on the ASAP Credit Card Blog. Get updates on the latest credit card news and find useful tips to help you build, improve and maintain good credit.