When You Should Not Abuse Your Credit Card, and Why
Credit cards are convenient and useful for earning rewards, building a credit history and some cards have low introductory rates, but this doesn't mean we should use plastic for every single purchase. Credit cards have a place in our financial life, yet overuse can damage our finances and credit score. Here are nine things you shouldn't put on a credit card.
1. Mortgage Payments Can Get Tricky
It’s one thing to pay your mortgage with a credit card and then pay off the balance in a couple days. It’s another thing to use your credit card every month because you can’t afford the payment. This approach digs a deeper hole. Since credit card interest rates are typically higher than mortgage interest rates, you’re basically trading one debt for another—at a much higher interest rate.
“You pay more than the monthly payment due to finance charges unless you pay the balance in full at the end of the month,” says Harrine Freeman, financial expert and author of How to Get Out of Debt: Get an "A" Credit Rating for Free.Using a credit card may seem like the only doable alternative when you don’t have money to pay your mortgage, but some mortgage lenders have hardship provisions to help borrowers who experience economic hardship. Depending on your hardship, you may qualify for a mortgage forbearance, which lets you temporarily stop making payments. Or you may qualify for a mortgage modification and receive a lower interest rate and monthly payment without having to refinance the loan.
2. Taxes are Risky Business
As someone who’s self-employed, I know the pain of having to pay the federal and state government every year. If you’re not fortunate enough to get a tax refund and you have to write a big fat check to the IRS, you may look into using a credit card if you don't have enough in your bank account. But while a credit card payment gets the IRS off your back, it’ll cost you.
“I don't recommend putting taxes on a credit card because they charge convenience fees that range from 1.87% to 2.25%," says Jim Wang, a personal finance blogger. "This is made worse if you can't pay off the charge in time because credit cards will charge a ton in interest on that amount.”
“If you need time to pay, you may be better off getting on an installment plan with the IRS. The IRS only charges you 6% a year to be on an installment plan.”You can also contact the IRS and request a 120-day extension if you can’t pay your taxes in full by the April 15 due date.
3. Avoid Credit Card Purchases in Foreign Countries
A credit card can be easier than cash when traveling in a foreign country. Just about every country accepts major credit cards like MasterCard, Visa, and American Express; and with credit cards, you don’t have to worry about currency exchange. But you should think twice before making a credit card purchase in a foreign country, according to Louis DeNicola, a personal finance writer.
When you use a credit card internationally, many credit card issuers charge a fee to convert the purchase into dollars. “It's better to pay with cash while traveling than pay the 2% to 3% the card charges,” explains DeNicola.
Read the terms of your credit card to see if your issuer charges a foreign transaction fee, or call your credit card issuer. If you frequently travel internationally, shop around for cards with no foreign exchange fee.
4. Education Fees are No Joke
Student loan debt is no joke. If you don't want to graduate with massive debt, paying your own way through school can eliminate the financial burden of paying back a loan after graduation—but only if you use cash.
You can use a credit card to pay for each semester, but you should only do so if you can pay the balance by the beginning of the next semester. If not, you could pay more for your college education than if you had applied for a student loan.
Federal student loans have lower interest rates than most credit cards. And when you apply for federal aid, you can take advantage of hardship provisions to avoid default, such as the option to defer payments. Depending on your type of loan, you might even be eligible for public service student loan forgiveness after 120 qualifying monthly payments.
5. Medical Expenses Can Hurt
Between high-deductible health insurance plans and costly office visits, one medical emergency can result in a mountain of medical debt. You may panic if you don’t have money to settle your balances, but a credit card isn’t the answer.
“Almost all hospitals and doctor offices are willing to work with you as far as a payment plan, which generally does not involve interest,” says David Bakke, business expert at Money Crashers.As a bonus, when you set up a payment plan with a medical facility, this debt doesn't appear on your credit report, unlike a credit card balance.
Charging medical bills to a credit card increases your credit utilization ratio, which is the percentage of your credit card debt compared to your credit card limit. The higher your ratio, the lower your credit score. Your credit utilization ratio should be no more than 30%. If you have a credit card with a $2,000 limit and you charge $1,000 to pay off medical bills, your ratio increases to 50 percent.
6. Steer Clear of Vacations You can't Afford
I always use a credit card while on vacation. It’s more convenient and I don’t have to worry about losing cash. But although I will burn a hole in my credit card on every vacation or getaway, I also pay the entire balance within days of returning home. I say all of this to say, there're a wrong and a right way to use credit cards on vacations.
You should under no circumstances use a credit card to finance a trip you couldn’t afford in the first place. A vacation can refresh and rejuvenate your mind and body. But the feeling will be short-lived if you return home to debt and have to work longer hours to pay off the balance.
7. Refrain from Paying for Large Wedding Expenses
The average cost of a wedding in the United States is about $27,021. Between the venue, cake, dress, photographer and other wedding-related expenses, the amount in your bank account may not be enough to bring your vision to life. It’s your special day and you deserve to be happy, but one of the worst things you can do is pay for a wedding with a credit card.
“You start off your marriage in debt, and money problems can lead to arguments or divorce,” warns Freeman. And let’s be honest, there’s no guarantee the marriage will survive. About 40 to 50 percent of marriages end in divorce, so the credit card debt could outlive the marriage.
8. Money Orders - Don't do it
If you need a money order, make sure you pay with cash. You probably don’t realize this, but if you use a credit card to purchase a money order, your credit card issuer may classify this purchase as a cash advance. And unfortunately, the interest rate on cash advances is usually higher than the interest rate on standard purchases.
9. Buying a Car can Drive Debt
You may think buying a cheap car with a credit card is better than applying for a loan. You don’t have to worry about your credit score or qualifying for a loan. And since the dealership views the deal as a cash purchase, you’ll have a clear title.
But even if a dealership lets you purchase a car with a credit card—which many don’t by the way because credit card transaction fees can eat away at their profit—you might do better financing the car through a bank. In all likelihood, your credit card’s interest rate isn’t as attractive as interest rates offered by many banks and credit unions. Also, some auto manufacturers run incentives in which well-qualified borrowers can receive 0% financing.
But one of the biggest reasons why you shouldn't use a credit card to purchase a car goes back to credit utilization. Credit card debt hurts your credit score more than other types of debts, such as a mortgage and a student loan. It doesn’t matter if you’re financing a cheap used car, the purchase can raise your debt amount beyond a healthy limit. Using a credit card with a $3,000 limit to purchase a used car for $3,000 utilizes 100% of your credit line, which doesn't help your credit score.