Millennials — those born between the early 1980s and late 1990s — generally want designer handbags, fun vacations, and high-quality furniture. However, student loan debt, mortgages, and car payments make it hard to pay cash for discretionary purchases.
According to a 2017 survey by the National Endowment for Financial Education and George Washington University, 59 percent of millennials surveyed carried student loan debt. About 70 percent had mortgages on their homes. Some millennials use credit cards to splurge. They pay the minimum balance each month, go further into debt, and watch their credit scores take a nosedive.
What’s a discerning millennial to do when he or she needs to furnish a new home? Many shop at furniture stores with easy credit approval. Even with bad credit, millennials can obtain financing at many furniture retail outlets. However, what may seem like a good deal on the surface could end up costing thousands in fees and interest payments.
“Many people try to save money by financing,” says Mandi Woodruff, executive editor of Magnify Money. “They’re also just as vulnerable to bad financing deals. You need to be aware of fine print.”
If you’re short on cash and have bad credit, then furniture financing offers a solution when you need to furnish fast. If you choose this route, be aware of the pitfalls to avoid further credit score damage.
Read the Contract
A typical furniture store offers deals such as zero interest for six or 12 months. That’s great if you can pay off the balance in full during that time. Otherwise, a deferred interest clause kicks in. This means you get hit with interest dating back to the purchase date. APR can hit nearly 30 percent — nearly twice the rate of a typical credit card.
Before you agree to financing, find out what happens if you miss a payment. Under the terms of some agreements, the furniture store may revoke the zero-financing offer. In that case, the deferred interest clause kicks in, and that’s not good when you’re already short on cash.
Watch Out for “Alternative Deals”
Furniture stores that finance people with bad credit may have a second option for people who don’t qualify for financing. These alternative financing agreements have different terms than the standard store financing.
“Usually the agreement comes from a different bank,” says Woodruff. “That bank may offer a bad deal.”
Alternative financing agreements may come with sky-high interest rates and no introductory offer, a deferred interest clause, late payment fees, or other unfavorable terms. The alternative agreement usually is not a good alternative.
Don’t Rent to Own
Discount furniture stores may offer rent-to-own furniture with no credit check. Be wary. These shops promise furniture right away with no long-term contracts, no credit checks, and no large down payment. However, you typically end up paying twice as much for your purchase.
For example, a rent-to-own store offers a sofa chaise for $21.99 per week. The sofa retails for $530. If you pay for the sofa over the required 54 payments, you pay $1,187. Suddenly, $21.99 a week isn’t such a good deal.
Consider a Personal Loan
Instead of using a furniture store’s “easy” financing, consider taking out a personal loan. You may pay a higher interest rate than someone with good credit, but it may still be better than furniture financing or standard credit card rates.
“Personal loans offer a fixed loan amount over a fixed period of time,” adds Woodruff. “You know what you have to pay every month, and it doesn’t keep revolving like a credit card.”
Check sites such as nerdwallet.com and magnifymoney.com to compare personal loan rates.
Raise Your Credit Score: Here’s How
To get an even better deal on furniture financing, postpone your purchase and work on raising your credit score. The two easiest ways to do this: you’re your payments on time, and use credit cards less often (or not at all).
Jacob Lunduski, financial industry analyst at Credit Card Insider, says payment history comprises 35 percent of your credit score. “If you have bad credit scores, always pay your bills on time,” he says. “Any late payments, collections, charge-offs, or bankruptcies will hurt your scores.”
How much debt you’re carrying in relation to your card limits accounts for 30 percent of your credit score, Lunduski says. “If you carry a lot of credit card debt, your scores will suffer. Don’t max out your credit cards, and keep your balances low relative to your credit card limits. If you’re carrying any debt at all month over month, pay it off as fast as you can. Your scores will greatly benefit in the long run.”
To help you get on track, Woodruff suggests taking advantage of balance transfer offers. Many credit cards offer promotions that allow you to transfer high-interest debt from one card to another with a zero percent APR offer.
“This allows you to make one payment instead of multiple, which is more manageable,” says Woodruff. “You’ll also decrease your debt use versus debt access, which may help your credit score.”