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When to Use a Credit Card Over Layaway

Sometimes Layaway is the More Expensive Option

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When credit card issuers were handing out credit cards like candy, stores had no reason to offer layaway. But now that credit card issuance and usage has dropped, layaway has reappeared as shoppers seek credit card alternatives for their holiday shopping. A whopping 86% of respondents to an About.com Frugal Living poll say they’re going to use layaway this holiday season.

There are a few great reasons to choose layaway over a credit card. For one, you avoid facing a hefty credit card bill at the start of next year. And layaway gives people who lack a credit card the opportunity to make payments toward big purchases. Despite the obvious benefits, layaway might not be the deal that it seems.

Fees for Store Layaway Plans

Most stores assess a $5 service charge on all layaways. Customers have the option of paying their layaway in 30 to 90 days, however, layaway plans over 60 days are usually reserved for bigger purchase amounts. Required down payments range from 10% to 20%. And if you don’t pay off your layaway by the deadline, you’ll be charge a cancellation fee between $10 and $15. Here are some of the layaway options available:

  • Burlington Coat Factory: $5 fee on 60-day layaway.
  • Kmart and Sears: $5 fee on 8-week layaway, $10 fee on 12-week layaway
  • Marshall’s: $5 fee on 30-day layaway
  • TJ Maxx: $5 fee on 30-day layaway
  • Toys R’ Us: $10 fee 30-60 day layaway (must pay in full by December 6)
  • Walmart: $5 fee on 30-60 day layaway (must pay in full by December 16)

While the $5 or $10 service fee sounds reasonable, it’s actually higher than the finance charge you’d pay on an average-APR credit card with the same monthly payment.

Layaway vs. Credit Card Example

Consider a $200 layaway at Walmart (who doesn’t let you layaway items that cost less than $15) that you pay off in 30 days. An equivalent credit card would have a 41% APR and no grace period (assuming you paid the same $20 cash upfront). And even if you used a credit card with those terms, you’d still get to take the merchandise home the same day, an option not available with layaway.

Using a credit card with a more normal APR of 18% (and that’s still above average), you could pay off the $200 balance in two months with payments of $101 and pay less than $1.50 in interest. In this case, the credit card is a better option unless your payments drop below $50 a month and it takes more than 4 months to pay off the balance.

When Credit Cards Make More Sense

I tested dozens of scenarios and in nearly every case, a credit card is the less expensive option when you pay off the balance in the same amount of time as you’d pay the layaway. If your layaway is less than $200, a credit card (one with a $0 balance) is definitely the better choice. A credit card starts to get more expensive when the layaway is over $500 and paid in full 30 days or less, when it takes more than double the time to pay off the credit card balance, or when the credit card already has a balance.

Layaway is very similar to a short-term loan, but you don’t pay interest since you don’t get the benefit of the “loan” until it’s paid off. Generally, a credit card is a cheaper option, if you’re going to pay off the balance with similar monthly payments in just three to six months. However, layaway is the better option if you think it will take you several months or years to repay the credit card balance. And if all your credit cards have above average interest rates, i.e. 20% and up, layaway is probably a better deal.

Consider the Cost of Canceling

Credit cards offer a little more flexibility when you can’t afford to pay the balance off quickly. However, that’s precisely the thing that makes a credit card more expensive. If you put items on layaway and later you can’t afford to pay off the balance, you’ll get a refund of what you’ve paid less the cancellation fee. Unfortunately, if you can’t pay the credit, you’ll get hit with late fees and possibly suffer damage to your credit rating. One late fee automatically makes the credit card more expensive than layaway. And the long-term damage to your credit score from missing payments isn’t worth it.

Forget what the numbers say, if layaway keeps your spending in check and helps avoid credit card debt, go ahead and pay the higher rate. Another option is just to save up for the purchases, if you have the discipline to leave the money untouched until you’ve reached your savings goal.

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