Credit Cards vs. Layaway: Which makes sense for you?

5:01 PM, Oct 10, 2012   |    comments
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Order it now, pay later. It's the way most people shop for the holiday season. Whether it's layaway or credit card, the question is: which one makes the most financial sense for you?

Take the scenario of buying $100 worth of toys. Most stores charge a $10 downpayment and a $5 service fee.

According to a professor at Cornell, that means paying $5 in interest for a $90 loan over two months, which is equivalent to a credit card with a 44 percent APR.

But Case Western Reserve UniversityBanking and Finance Professor Bill Mahnic says most credit cards have a 1.5% APR and shoppers can keep it simple.

"If your APR is higher than 1.5 percent, $100 dollars worth of toys at a 5 percent fee, take the layaway. But if your APR is less, the credit card is going to be cheaper than the layaway charge," Mahnic says. 

Layaway forces dicipline, which Mahnic says is better for people who tend to carry the balance over to the next holiday season. But for consumers who pay off their balance, credit has its perks.

"A lot of credit cards right now are offering some really good deals where they'll give you 2 to up to 5 percent back, depending on what you buy," Mahnic says. 

That's better than most CD interest rates.

If you decide to try out a layaway program, here are a few questions the Better Business Bureau says you need to ask:

How much time do you have to pay off the item? What are the penalties if you miss a payment? And what happens if you no longer want the item after making a few payments?


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