Credit cards can be a valuable resource for building your credit history, funding important purchases, and reaping valuable rewards. But there are limits to what you can and should pay for using your credit card. While credit cards can open doors, create opportunity, and improve your financial standing, they also come with certain risks. And if you use your credit card for an inadvisable purchase, you’ll usually end up paying more in the long run once you’ve accounted for interest payments and the potential of a negative impact on your credit score.
Of course, there are lots of great reasons to use a credit card. And if you use your credit card wisely, it can even help your family advance its savings goals. To find out how, check out our look at these 10 Ways that Credit Cards Can Help Your Family Save.
Otherwise, read on for a look at 10 things that you should avoid putting on your credit card…
1. Mortgage or Rent
It’s never a good idea to pay this hefty monthly expense using a credit card. Housing is the largest expense that most Americans must contend with. In fact, it’s generally too large to put on a credit card. This is why most reputable mortgage companies actually have rules against it.
According to CBS News “many mortgage companies won’t let you pay your mortgage with a credit card. Although there are third-party companies that will enable you to use your credit card to pay your mortgage, they often also charge fees for this convenience, which will just add to the amount you’re paying in bills each month.”
In other words, even if you can find a way to pay your rent or mortgage using a credit card, it will end up costing you more in the long run. If you’re struggling to pay for housing, using a credit card to get through a month or two will only deepen your long-term financial struggles.
2. A Car
The same rules apply to purchasing or leasing a new car. This is another costly item that is either inadvisable or entirely impossible to buy using your credit card. Indeed, in addition to being about the least cost effective way to buy a car, you probably won’t even be allowed to do it through most dealers. According to Money Management International, “Most dealers don’t allow you to put a car or even a portion of the amount on a card because their processing fees are too high. But even if you can pay for all or part of your car with a credit card, you shouldn’t. The interest rate will be much higher than applying for a personal loan.”
Such is to say that, in most cases, your best bet for financing a vehicle will be through a traditional auto loan. This type of personal loan is generally structured with more favorable interest rates and none of the processing feeds that can make credit card use so onerous.
3. Medical Bills
Never use a credit card to pay down medical bills. For one thing, a great many medical providers will be willing to work with you to structure repayment arrangements. As long as you remain on top of your monthly payment obligations, you will likely not be charged interest, nor will this debt impact your credit rating. But it is critical that you remain current on any payment arrangement you make. Failure to do so may result in your debt being sent to collections, which most certainly will have a negative impact on your credit rating.
There is one possible alternative. If your healthcare provider requires immediate payment, you may be able to apply for and use a credit card that is designed for medical expenses. In some cases, this type of credit card will carry more favorable terms than the traditional credit card, especially in terms of interest and processing fees. Applying for a medical credit card may be a good strategy as long as the terms of this offer are favorable. Money Talks News advises that “If you use a medical credit card available through your health care provider’s office to pay bills, be careful to read the fine print about your obligations, particularly those regarding how and when interest is charged.”
4. Cash Advances
Your credit card offer comes with several different interest rates. The lowest one typically applies to everyday purchases made using your credit card. The highest one is almost always the interest rate you’ll pay on any sum borrowed through a cash advance. Simply stated, the cash advance is among the single most expensive transactions you can make using a credit card.
The fees that apply to cash advances are heavier by design. This is an area where credit card companies make a great deal of money off of their customers. Indeed, multiple layers of fees and charges will usually apply to a cash advance. To the point, you may pay both a flat transaction fee for receiving a cash advance and an additional percentage-based fee (usually between 2-5%) on the total sum borrowed. And once again, to determine the cost of a cash advance, you also have to add these fees to the significantly higher interest rate you would have to pay on the resulting balance, as compared to the balance on traditional credit card purchases. When it comes to credit card usage, you should do your best to avoid taking out cash advances in all but the most desperate situations.”
5. Alternate Payment Methods
Cash advances aren’t the only convenience that will cost you more than they’re worth. Alternative payment methods are often also included as a convenience with most credit card offers. But like cash advances, you will pay for this privilege. According to CBS News, “Alternate payment methods include everything from money orders to person-to-person cash transfers, and are also generally considered a cash advance. While it might be convenient at the time to use your credit card for such purchases, you’ll wind up paying a lot more for it than you would expect, including a one-time fee of around 3 percent and a higher interest rate.”
These days, there are countless mobile apps like CashApp and Venmo that you can use to make personal monetary transfers instantly and without a fee. This is invariably a better and more cost effective way to make this type of person to person payment. As far as money orders are concerned, you’ll always pay less by doing it the old fashioned way—at the counter of a bank, post office, or participating convenience store.
6. Student Loans
As a college student, you’ll learn all kinds of valuable academic and life skills. Part of this experience should include learning how to use and manage a credit card responsibly. If you’ve spent your college time wisely, then you probably already know that it’s not such a great idea to pay for your student loans using a credit card.
Money Management International warns that using a credit card to pay your student loans will only magnify the financial challenges you face as a recent graduate. The reality is that if you’re struggling to meet your monthly student loan installment amount, you may have a variety of better options. As Money Management International notes, “If you can’t afford to pay your student loan, look for other options like deferment, income-based payment plan, or even a loan forgiveness plan. Using a credit card to pay off your loan will increase the amount of interest charged, therefore increasing the amount you owe.”
You might also be in line to consolidate your student loans if you’re in the midst of juggling multiple installment plans. This is a great time to explore this possibility, which could lower both your monthly repayment amount and your overall interest rate.
Simply stated, using a credit card will almost always deepen your student loan debt by compounding the interest you already owe. Talk to your student loan provider about a better alternative.
7. Your Taxes
A big tax debt can be a drag, but using your credit card to buy yourself some time will only make matters worse. If you’re looking for a way to manage heavy tax bills, your credit card will rarely be the preferred option. This is because the IRS makes it more costly for you to do so.
Money Management International warns that when you apply “your IRS payment to a credit card, you’re charged an additional processing fee. The fee isn’t charged by the IRS, but a 3rd party payment processing center that charges up to 2.35 percent. That may only be a few dollars if your bill is small, but a $4,000 tax bill can cost you more than $80 in upfront fees. This is in addition to the interest rate your credit card company will charge.”
You’re much better off reaching out to the IRS to discuss a repayment plan. While there will be interest charges on this repayment plan, the total repayment sum will neither impact your credit score nor result in the double-charge you’d incur by using a credit card. No matter how you slice it, repaying this amount directly through the IRS will be more cost effective in the long run than carrying that balance on a credit card.
8. Big Ticket Items You Can’t Actually Afford
It’s not unreasonable to use your credit card for a big-ticket item. After all, this is a great way to build a strong credit rating. However, this benefit also comes with a big grain of salt. Never use your credit card for an expensive item that you can’t actually afford. I know. It seems counterintuitive, right?
Isn’t the point of the credit card to help facilitate a purchase that you might not be prepared to make with cash? Well, sort of. That only works if you will be in a position to pay down the total amount in 30 days or less. Indeed, the bottom line is that you should only really use your credit card for purchases that you can afford to repay quickly, if not immediately.
There is also a flawed logic in using a credit card to pay for a big ticket item unless you enjoy a promotional period with 0% APR. Borrowers with good credit are often in a position to take advantage of such offers. It’s not uncommon for a furniture or appliance store to provide such offers as an option for buyers, typically with a 6 to 12 month 0% APR repayment grace period. Naturally, this is an advantageous way to go if you are eligible for such an offer.
In any other circumstance, you are almost certainly going to pay far more for this luxury item if you attempt to finance its purchase with a credit card. As Money Talks News warns, “Credit cards offer great purchase protections and should be used for many big-ticket purchases. But buying something on credit when you can’t afford to pay it off right away isn’t smart.”
9. Small Impulse Items
On the opposite end of the spectrum, You don’t want to lean on your credit card for constant, everyday purchases either. The nickels and dimes can add up. As CNBC notes, “It’s not just the large purchases that can set you back, but the minor ones as well. If you’re someone who likes to rack up points and rewards by charging entertainment, travel and dining costs onto your credit card, just make sure you have a plan to pay your balance off in full when the bill comes.”
If you do plan to use your card for smaller, everyday purchases, try to focus on items that come with cash-back rewards. Consult your credit card offer to see if you enjoy rewards for use at the pump, when booking flights, or when selecting travel lodging.
10. Unsecured Online Purchases
Responsible credit card spending isn’t just about what you buy, but how you buy. If you do any of your shopping online, it’s important to protect yourself. Start by making sure you only use your credit card on verified and secure e-commerce websites. According to Money Talks News, “When shopping online, make sure the web address starts with ‘https’ rather than ‘http.’ If it doesn’t, that’s your cue to take your online shopping elsewhere.”
Minimize the risk of identity theft, credit card theft, or fraud by restricting online purchases to trustworthy sites and vendors.
Of course, using your credit card online can open you up to a variety of risks even if you do everything right. That’s why it’s important to understand the threats to your security and identity that permeate the web. Before you make your next online purchase, make sure you check out these 10 Ways to Prevent Credit Card Fraud Online.