Maybe you've just moved into a new apartment or a home, and you're looking to build your rooms with some new furniture. Perhaps you have a new addition to the family coming soon, and you need a crib and a child-size bed. Maybe you're looking at replacing an old hand-me-down couch and want a new one.
You look around, do some shopping, and what you see is shocking. Individual pieces of furniture can cost as much as a used car. Couches can cost upwards of $5,000, and bedroom sets can surpass $3,000 - on sale.
Most Americans are living paycheck to paycheck. How can you hope to swing that much cash for a piece of furniture?
As you might expect, there are options. You could try to take out a loan, but going to the bank and asking for a loan to buy a couch is disheartening. You can put the furniture on credit, but if you need your credit card for emergencies – or your credit limit is lower than the furniture cost – you might not want to do that.
Luckily, many furniture stores today understand this. They use systems like Afterpay, Klarna, or Affirm, to offer financing options. They may also offer in-store financing. You can buy your furniture, get it delivered and set up, and make lower monthly payments until you've paid it off.
Financing anything – whether it's a home, a car, or a couch – involves opening up a line of credit, and that all gets reported on your credit report. That brings us to the crux of the issue; will financing a piece of furniture hurt your credit score, and if so, is it a temporary or long-lasting hit?
If we distill everything down to a simple answer, then the answer is yes. Yes, financing a piece of furniture can hurt your credit score. The damage may be temporary or permanent, depending on various factors, and that's what the rest of this post will discuss.
Any time you open up a new line of credit, you run the risk of hurting your credit score. Most of the time, the drop in points between opening a new line of credit and the credit checks associated with it will be temporary.
What factors should be considered? Do you have alternatives?
Let's dig in.
Financing furniture can be risky in more ways than just your credit score. Your credit score is essential to significant financial decisions and major purchases, but it's not usually impactful for most of your everyday purchases. Meanwhile, your ongoing monthly expenses, debt, income, and ability to pay for living costs are much more impactful. Here are several of the risks inherent in financing furniture.
One of the most significant risks of financing furniture is over-spending. This risk can present itself in two ways.
The first is only looking at monthly payments and not the overall cost of a piece of furniture. You don't notice because all you see is a $99 monthly payment. A good furniture piece might run you $1-2,000, but the price jumps up to nearly double when financed.
The second risk is spending more than you need to pay. What's the difference between a $2,000 couch and a $5,000 couch? Often, the answer is "a brand name" as much as anything else. The cheaper couch might not have a designer name or come from as fancy a store, but it's still a durable piece of furniture. But, when you're looking at monthly fees instead of overall pricing, it's easy to convince yourself you can justify a more significant expense.
Another risk is the dreaded "introductory offer" that stores will use to get you to sign a contract without fully understanding what you're doing. They'll tell you that you'll have 0% interest for many months or years, but the actual duration of the financing goes on much longer. After a certain point, your total loan value starts to increase. If you don't increase monthly payments to match, you could pay $5,000 for a $3,000 couch just because of how the interest compounds.
Generally, financing furniture is an excellent way for a store to hide the real numbers from their customers and make significantly more from you than they should. Always make sure to read and understand the terms of any financing you consider.
Generally, when you finance a piece of furniture, it will be reported on your credit score in one of two ways.
The first is a "consumer finance loan," a subprime loan commonly responsible for low credit scores. Even if your credit is otherwise acceptable, a consumer finance loan – or more than one, if you're financing multiple pieces of furniture – can look very bad to the credit bureaus.
The other is even worse: the revolving account. Revolving accounts count towards your credit utilization while not giving you the benefits of different kinds of utilized credit - this is because of how a revolving account is reported.
A revolving account is reported as a line of credit with, essentially, 100% utilization. If you finance a piece of furniture for $3,000, your credit report sees a new line of credit with a $3,000 limit and $3,000 utilization for 100%. This increase adds to your other lines of credit. If you have one credit card with a $4,000 limit and a $500 balance, your credit score utilization is 12.5%. If you add on the furniture account, you now have a total credit limit of $7,000 and total utilization of $3,500, or 50%.
Utilization is 30% of your total FICO score, and a higher utilization is generally worse. Going from 12.5% to 50% overnight is devastating.
Another factor related to your credit utilization but slightly different is your debt-to-income ratio or DTI. Your DTI is the percentage of your income that goes towards your debts every month. You total up all debts (like mortgage, car loans, personal loans, and, yes, financed furniture) and divide them by your monthly income.
If you make $2,000 per month and have $1,000 per month in ongoing debts, your DTI is 50%.
The trick is that DTI isn't directly relevant to your FICO score. It's indirectly relevant. Lenders will look at your reported DTI to decide what kinds of loan terms to give you. A high DTI can make it harder to get a car loan or mortgage or will only offer you hire rates when you get one. That further hurts your overall financial situation.
One of the most significant risks of financing furniture is missing payments, paying late, or generally failing to pay on time.
Moreover, it's easier to slip on paying for something like a piece of furniture than it is something more essential, like medical bills, rent, car payments, or credit card debt. Furniture purchases aren't viewed with the same seriousness as a car loan, even if, legally speaking, the loans are near-identical.
On top of this, even if you financed furniture for 0% interest, there are guaranteed to be fees for late or missed payments. Those penalties can add up on top of the loan's initial principle, making it harder to keep paying off.
Many furniture stores will happily work with you to lower or even temporarily defer your payments if you face financial hardship. However, many people don't think of that option and might not consider it. The vendor would much rather continue to get regular payments than have to deal with collecting on an account or selling the debt to a debt collection agency.
If you miss enough payments on any loan, you go into default. You can also default on a loan for furniture. If anything, that second example is even more common. Paying a credit card or a bank loan is more prominent and usually has higher value and higher importance; if any debt will slip through the cracks, it's financed furniture or other household items.
Defaulting on any loan is devastating to your credit score. Moreover, you may still end up with financial penalties. Often, if a collection agency can't get you to pay, they will get a court order to repossess the item in question, like your couch. Since furniture depreciates significantly, it will be valued lower when they sell it than the remaining value of the loan, and you'll still be responsible for the difference. Further financial strain puts additional stress on your ability to handle payments and can spiral your credit score downwards.
Now, if you read through the above and think, "none of this is relevant to me; I'm not going to default on my loan," that's fine. Financing is acceptable when done correctly, with no late or missed payments.
That's all it is: fine. It's not inherently good for your credit, but neither is it bad.
Your credit score may even have improved when you finish paying off the loan. By paying for financing, you demonstrate that you can be reliable with your payments and that payment history can be beneficial.
Is financing furniture better than putting the cost of the furniture on a credit card, assuming you have a limit high enough to support it? No, not really. A revolving account can be worse than a higher credit card balance, but neither is great, and we're likely talking about a difference of less than 5-10 points. Either way, you're bumping up your credit utilization.
If reading all of the above has scared you away from the idea of financing, don't fret; you have two alternatives.
The first, if you need furniture immediately, is to buy used. Used furniture may not be as glamorous – and it can still be expensive to purchase directly – but it's an excellent way to get furniture for less cost than buying and financing new. Even if it's only a year or so old and relatively undamaged, used furniture is going to be much less expensive than the same piece of furniture brand new. It's like a new car losing value the moment you drive it off the lot.
If you buy used from another individual, it won't even be reported on your credit score. If you buy from a used furniture store, you would only notify the credit bureaus if you purchased it with a credit card or financed it, and even then, the number is much lower, so the hit to your credit is lower.
If you don't need furniture immediately, the other option is to save for it. Calculate your monthly payment for the furniture if you financed it, and then put that amount of money into a savings account each month. Then, when you've racked up enough to purchase the furniture outright, you can afford the purchase and save significant amounts of money on financing fees and interest.
You avoid any fees or penalties associated with financing by saving up for a purchase. You prevent any hit to your credit report. You also have liquid cash available in the case of a catastrophe and the need to spend in an emergency. On top of that, you can even gain some value to your credit score by purchasing with a credit card and immediately paying it off.
Financing, when done correctly, isn't going to demolish your credit score. However, it's still not often a good idea unless you have no other options.
Are you considering financing furniture, and have you considered some of these other options? Will you finance through your bank, a credit union, or directly with the furniture seller? Do you have any questions for me on this topic? Please let me know in the comments section, and I'll do my best to point you in the right direction!