Credit cards are an all too easy method of paying for the things we need and want. They are more convenient than carrying around cash. You can swipe them just about anywhere these days to cover any expense. However, you need to be careful about how to use your cards. That is because too much spending can quickly lead to significant credit card debt.
Paying that off can be a challenge. This is particularly the case when your annual percentage rate can get as high as 24% or more. The interest accruing on your credit card balance will only add to your debt.
Thus, before you know it, you miss a payment or two. That is when the late fees and penalties get assessed. They inflate that balance even more. Soon enough your credit rating will take a hit. That, in turn, will lower your score. It makes you a risk in the eyes of potential future lenders.
Responsible credit card use is critical to maintaining your credit rating and your financial stability. Credit cards are a modern convenience that we all enjoy. Therefore, it is important to understand how certain expenses can affect your creditworthiness.
The first rule of credit card ownership is to spend only as much as you are able to pay off each month. Unfortunately, most of us don’t follow that rule. We put more expenditures on our cards than we can cover when the statement comes around. That is a recipe for getting into some serious debt and the convenience becomes anything but. It could then take years to fix your credit score.
It may be tempting to make certain credit card purchases. However, there are some expenses that you really should never put on a credit card. We have ten such examples of items that many consumers mistakenly pay off with credit. Doing this is much to the potential detriment of their financial situation.
Adding these expenses to your credit card balance may actually lead to you paying more in the long run. No one wants to pay more for something. As such, you need to avoid falling into that trap. You will want to refrain from paying off these expenses with your plastic.
1. Mortgage Payments
Many mortgage companies will not allow you to pay down this expense with a credit card. Yet, many consumers do find ways to cover their monthly payments by “charging it”. In most instances, the card acts as a safety net.
This is done to avoid missing a payment when the borrower does not have the cash on hand to cover the expense. However, doing this can lead to big problems. This is especially if you enjoy a higher credit limit on that card.
The mortgage companies or banks typically frown upon accepting credit card payments to meet obligations. Conversely, there are third-party processors. They are more than willing to help you make a payment with your card. They will charge you a fee for this service. That is extra money you are needlessly paying out that month.
Accordingly, that is an additional expense. It is on top of the interest you may be paying on that money. It is incurred if you are unable to pay off your balance in full when the statement comes due.
Additional fees and interest are adding bucks to the bill which is not prudent. That is because interest is already being added to your mortgage monthly. There is no reason to make your mortgage more expensive than it needs to be.
Using your credit card to pay it off is exactly what you’re doing. There is even something worse. The higher your balance, the more your credit utilization ratio is affected. That will start to negatively impact your credit rating.
2. Startup Costs
Starting your own business can be thrilling, overwhelming, and expensive. A prospective small business owner may be lacking in finances. Thus, they will often turn to their credit cards to cover the costs associated with getting that new enterprise up and running. That quick fix can often become a long-term problem. This is because most new businesses don’t show much, if any, profit in the initial years.
Those expenditures are going to come due with your credit card company. That is regardless of whether or not your company turns a profit. You’re on the hook for making those payments. You can keep them on your balance for an extended period of time. Then the interest kicks in. It makes startup costs more expensive than if you paid for them in some other way.
That does not even take into consideration the possibility that the company ultimately fails to catch on. If you’ve placed extensive startup costs on your credit card, those could remain in the balance for months, perhaps years.
Late fees and interest are sure to be added over time. Additionally, if you miss a payment or two, that APR could quickly rise to as high as 29.99% in most cases. Now you’re paying even more interest.
Avoid turning to your credit card as a financing source. You may find you can get better rates on borrowed money by taking out a business loan. You’re going to have to pay interest on money being used to start a new business.
Therefore, you may as well seek out the lowest rates possible. In almost every case, a loan will prove to be a smarter financial decision for your long-term fiscal outlook. That is the case, even if your credit score is not in the “good” or “excellent” ranges. You’re likely to find a better rate from a lender than from your credit card.
3. Small Purchases
When you’re shopping with a credit card, any purchase might seem like a suitable expense regardless of how much it costs. You may have one of those cards that offer some form of rewards for each dollar you spend. This could be in points, cash back, even airline miles. Swiping your card at checkout might yield some kind of benefit.
However, those benefits that you’re earning may not be worth the debt that you’re taking on with every purchase you make. Those purchases are just a few dollars here and there, but it’s much easier for those expenditures to add up and put you deeper in debt over time.
These seemingly inexpensive purchases are the easiest to lose track of as the days go on. The result is a monthly statement that is excessively high. Think of it as a death by a thousand cuts as your balance increases by a few bucks each time. Then, you’re nearing your credit limit and you don’t even realize it.
When the bill arrives, you may have racked up some pretty sweet rewards. However, you’re also left wondering how you’re going to pay the balance off in full by the due date. If you don’t, the APR kicks in.
Thus, you’re paying out more money for the privilege of maintaining a balance on that card. It is not worth it. Next time you need to pay for that small expense, pay in cash. Instead, swipe your card for larger expenditures.
4. Car Purchases
There are some consumers who have chosen to use their credit cards to pay for so-called “high ticket” items such as automobiles. Many have certainly used it for the up-front down payment.
That is because they can dispute the payment with their card’s issuer in the event that the auto dealership suddenly goes out of business. Either way, putting these costly expenses on a credit card is a great way to rack up the rewards if your card has a program.
Nonetheless, putting an endless amount of small purchases on your card can lead to debt disaster. It adds higher costs like a down payment or a monthly car payment on the card. This can also make paying off the statement in full a challenge.
Again, you could be facing high-interest payments if you can’t pay off your balance by the due date. You could be taking on late fees as well. That car you bought just became more expensive. You likely had to haggle with the dealership to bring the sticker price down.
Paying in cash is the better solution. You may not have the amount you need to cover the down payment or subsequent costs without resorting to your credit card. You might want to wait to buy that particular vehicle. Conversely, you can find another one that costs less.
5. Taking a Cash Advance
This is one of the biggest “no-no’s” when it comes to your credit card. Do NOT look to your card as fast fix ATM. That is because borrowing that money is going to be incredibly expensive.
You’re already dealing with an APR on purchases and balance transfers. Depending on your credit score, your rate may either be manageable or dramatically high. However, it does not matter what your regular APR may be.
The rate your card issuer typically charges on a cash advance is most always significantly higher. You’re essentially taking out a loan from your card company. They are going to charge you through the nose for that privilege.
The APR is not the only added expense you need to worry about. Let’s say you draw down a cash advance from your credit card. In doing so, you’re dealing with the higher APR in addition to fees that are also applied to the amount.
In many cases, it is a flat fee. It can be as low as a few bucks to as high as $5-$10 per transaction. Some cards charge a percentage of the amount being withdrawn instead of the flat fee. If you’re taking a significant advance, that can get particularly costly.
In the end, you’re adding the amount borrowed in addition to interest and fees to your credit card balance. Those are unnecessary charges. They can be avoided by finding an alternate means of getting your hands on fast cash. If you take a cash advance, be sure it is an absolute emergency. Try not to borrow too much so your fees are kept to a minimum.
6. Down Payment Expenses
We have already discussed the pros and cons of using your credit card for a down payment on an automobile purchase. However, some consumers try to make down payments on a variety of other things with their credit cards.
In just about every case, this is a bad idea. Sure, it may be tempting to do so to get rewards points or airline miles. Maybe your card has a high credit limit. Thus, you can put that cost on your card without any problems. Though, in reality, you’re asking for nothing but problems.
You may have no other recourse but your credit card for paying off a down payment on a high-cost item. This can be a car or even a loan. In turn, you may be getting into a situation that could prove problematic and costly down the line.
That can include the high cost of your interest rate adding more debt to your balance. You could also be running into credit utilization issues again. That is so if your balance is excessively high when compared to your available limit.
In order to maintain a healthy credit rating, most credit experts suggest keeping your utilization ratio to less than 30%. Anything higher than that could negatively impact your score.
For illustration purposes, if your credit limit is $1000, you don’t want a balance of more than $300 at any time. Going beyond that number for an extended period of time could lower your credit score.
7. Utility Bill Payments
The utility companies offer easy to use websites where you can pay those bills with a credit card, whether it is your gas bill, the electric bill, even your cell phone bill. You can choose to visit the site to make the payment each month it is due.
Additionally, you can set up automatic bill pay. That way you don’t need to remember to log on and enter your information each time. They just charge your card automatically at the due date. Then, there’s nothing to worry about.
However, it may not always be the best idea to link your credit card to your utility accounts. That is because some of these convenient websites may charge you a fee for using the service. This is on top of the interest and potential late fees if you miss a payment or submit the minimum payment on your balance each month.
It is good that you paid your heating bill on time. Though, missing your credit card payment could be just as damaging to your finances. If you have the option, consider linking a debit card to these accounts instead of your credit card.
Paying with a debit card means the money is taken directly out of your checking or credit union account. You do not need to worry about taking on any additional interest payments.
You will want to monitor that checking account to make sure you don’t drive into the red. If that happens, you could be paying overdraft fees instead of interest payments. Those can be higher in some instances.
8. Tax Liability Payments
Among the many costs you should never pay with a credit card, your tax bill is pretty high on the list. The IRS is more than happy to take a payment via credit card. That is not the issue.
The problem comes with the fees that you may be facing if you decide to pay with a card. This does not apply to all cards, however. It is only applicable to credit cards. Paying with a debit card or your checking account will cost you less, according to the IRS.
Most tax payment processors would rather you used the debit card. This is because it is connected to your checking account. The money comes right out upon processing. That is why you will not have to pay more than a couple bucks as a fee on a debit payment.
Paying with a credit card rarely comes with a flat fee. A percentage of what you owe is applied instead. That can be as high as 2%. Perhaps you owe somewhere around a few thousand dollars on your taxes. 2% of that sum can get pretty expensive.
Plus, it is certainly much more than the typical fee of about $2.50 for each debit transaction. So before you enter your card number to make a payment, consider using debit over credit and you will not have to pay more on your taxes than what you owe.
9. Tuition Costs
Stop me if you have heard this one before. Using your credit card to pay off college tuition may be a convenient method for covering education costs. That is especially true if you are lacking the funds to handle those expenses when they come due.
Unfortunately, the already high cost of going to school may get even more costly. You then need to factor in the convenience fees of using your card to make your payments.
A majority of the colleges and universities that accept credit cards for tuition will tack on a percentage of what is owed as their fee. It could be two to three percent, maybe more. That seemingly small number can mean serious additional costs on top of what you owe the school.
Beware of interest and potential late fees. You may not have the funds to pay off your balance once you’ve put your tuition fees on the card. Bring the card to a zero balance when the due date comes around, you’re just paying more to go to school and that is not very smart.
If you are having issues paying for school, you could look into other avenues for resources like a federally-backed student loan, a grant, a scholarship, or the school’s financial aid office to see if you qualify for any assistance in lowering or paying off those tuition costs.
Everyone is mandated to have some form of health insurance until the Trump Administration and the Republican Party tell us otherwise. Hence, paying for medical expenses may be easier when you have that coverage.
People may be dealing with high deductibles, or are not in compliance with the Affordable Care Act. Thus, paying for medical costs can be a serious challenge. It might make you consider using your credit card to pay off those medical expenses.
Here is why that is not such a smart move. You guessed it. The amount you are putting on your card to pay off those medical bills could end up costing you more than what the doctor or hospital is charging you. That is due to interest and possible late fees. Those, in addition to penalties, will be incurred if you are unable to pay down your balance in a timely manner.
It may seem like your credit card is the only option you have. Though, there may be other alternatives. These include negotiating with your provider to bring down some of those costs.
It also could be setting up an installment plan to pay off what you owe over the course of a few months. That can certainly make it easier to pay down your medical expenses. Let’s say the facility charges you interest. The interest expected by your credit card issuer would almost definitely be less.
Credit cards are a modern convenience. We tend to take advantage of them far too freely. That is why there is an estimated $762 billion in outstanding credit card debt in the United States.
Responsible use is the best way to avoid becoming part of this staggering statistic. Refraining from putting these particular expenses on your card is a good place to start.
Interest and fees make up a substantial portion of the nation’s credit card debt. Do not saddle yourself with these types of charges on your card balances. Thus, you will not have to worry about paying more for the expenses you need to cover.