Few marketing cliches are as alluring as “buy now, pay later.” Quick satisfaction. Who can resist being able to obtain what they cannot afford with nothing more than a promise and a signature (and these days, frequently not even that)?
Experian, a credit reporting agency, estimates that the typical American has 3.1 credit cards with a total amount of $6,354. According to the Center for Microeconomic Data at the Federal Reserve Bank of New York, the total amount of credit card debt in this country is currently $829 billion. Approximately 8% of the outstanding balances are currently 90 days or more past due.
It is obvious that we charge a lot of our purchases to our cards, and it is also obvious that we cannot always pay for them on time, if at all. Despite the fact that practically any good or service can be purchased with a credit card, even ones you wouldn’t think, there are certain scenarios in which cards probably shouldn’t be used, even if it is possible.
The secret to using a credit card responsibly is to weigh the potential interest costs and fees against other financing options, research the potential effects of this specific credit card use on your credit score, and refrain from charging items that you won’t be able to pay off within a reasonable amount of time.
1. Mortgage Payments
Is it possible to use a credit card to pay for a mortgage? the answer is probably, but it does not make it a wise decision, especially if you are tempted to pay your mortgage with a credit card with a large limit due to a financial shortage.
Most mortgage providers won’t permit credit card direct payments. While some third parties, such as Plastiq, may assist you in using your credit card to pay your mortgage, they frequently impose fees for this convenience, which will just increase the total amount of bills you pay each month.
If you don’t intend to pay off your credit card amount in full each month, it’s a bad idea to avoid your mortgage servicer by finding a means to pay your mortgage using a credit card. Your mortgage already carries interest, so adding more to your credit card amount would be costly and unnecessary.
Your credit score could be impacted if you charge a lot on your credit card because it will reduce the amount of credit you have available to you. If you use a credit card to pay your property taxes, this could also occur.
2. Buying From Unsecured Websites
This one should be obvious.
It is dangerous practice to send credit card details or any other sensitive information to a website whose address starts with HTTP (for hypertext transfer protocol), where HTTPS stands for secure. Although not all HTTP addresses are vulnerable, the likelihood of “man-in-the-middle” hackers intercepting your credit card information and other personal information is significantly increased when using HTTP sites, particularly if you use your computer in a public setting like an airport or coffee shop.
An HTTPS connection that is properly setup hides user data, ensures that the user is connecting to the “genuine” website in question and not a clone, and protects the integrity of data sent between the user and website.
3. Cash Advances
A cash advance is either a small loan or a withdrawal from your credit card account. The usage of a credit card cash advance is discouraged because there can be high fees and interest rates related to the withdrawal.
Your annual percentage rate and fees may differ depending on your bank and credit card issuer, but frankly speaking, the APR for a cash advance is higher than the APR for a purchase.
For instance, you might have a credit card with a purchase APR between 11% and 12% and a cash advance APR of at least 25%. Another potential expense is a transaction fee, which may be a flat rate or a percentage of the transaction value.
Cash advances are undoubtedly needed occasionally, but they should only be taken out in true emergencies. Always look for credit cards with fair cash advance costs as well.
4. Making Down Payments on Anything
It is alluring to put a down payment on a car, a boat, or even a house using a credit card. Consider how many points or miles you could earn! However, this is not a good idea unless you are using the card only for the points and can pay off the entire amount charged as soon as the payment is due.
Current new auto loan APRs are 5.05 percent for 48 months and 4.99 percent for 60 months. Since very few credit cards have interest rates that low, it would be more prudent to finance the amount after making the smallest cash down payment. You might not be able to buy the car if you lack the necessary funds. (Not all automobile lots will accept credit cards; CarMax is one example.)
It would be even worse to charge for the down payment on real estate. Few people have credit card limits high enough to cover the standard 10% to 20% down payment on a house, and even those who have would probably experience a drop in their credit score.
Your FICO score, which accounts for more than 90% of lending decisions in the US, may plummet by at least 40 points if you max out even one credit card. In any case, you can’t put a down payment on a house straight on your card; you have to use a cash advance, which is also a bad idea, or a mobile payment app like Venmo, which will charge you a 3 percent fee on top of your payment.
5. Making “Sin” Purchases
Credit cards are accepted in lovemaking establishments, on pornographic websites, and even when hiring call girls. Billing from these sources could appear to be “consultation fees” or another form of anonymity, but all card purchases are tracked in a virtual database, making them usually traceable by hackers and law authorities.
Remember that if you use your card to pay for a hotel room or an expensive meal somewhere you shouldn’t be, or if you buy gifts for somebody who aren’t your partner of record, you could be more easily identified.
A solid rule of thumb is to never charge something on your credit card if you wouldn’t publish it on social media.
6. Paying Off Other Credit Cards
You shouldn’t merely use another credit card to settle a credit card bill. There are solutions to this issue, but none are perfect. One method is to make a cash advance with your card, put the money in your bank account, and then use it to pay the bill.
Use one of the convenience checks that credit cards occasionally issue to users is an additional option. Both procedures will cost money, and checks and advances typically have a larger APR than typical transactions.
Transferring the credit card amount to a new card is an additional option. Moving a debt with a high interest rate to a card with a 0% APR can be a smart move because many credit cards provide 0% APR for a set amount of time (15 to 20 months is normal).
For the 0% rate, however, you must pay special attention to expiration dates and take care to never make a payment late (which automatically triggers a considerably higher APR). Of course, eventually you will run out of cards and will either need to pay the full amount or put the money back into an account with interest.
7. Paying College Tuition
The expense of attending college can potentially exceed the cost of living, depending on where you reside. It can be tempting and convenient for broke college students to pay their tuition using a credit card, but resist the desire.
You might not be able to pay off your credit card balance before interest is charged if you don’t have a reliable source of income. Additionally, many institutions charge a convenience fee for accepting the payment of 2% to 3%.
The bottom line is that, even if you have problems paying your tuition payments on time, it is not worthwhile to pay for your tuition with a credit card. A much better way to finance your school is through student loans. For direct loans, the current federal interest rates run from 5.05 percent to 7.6 percent, and it is difficult (if not impossible) to undercut those rates with a card.
8. Buying Stocks
When using a credit card to buy stocks, the buyer must weigh the potential return against the potential cost, which includes interest and other charges from accounts that aren’t paid in full each month.
When adjusted for inflation, the listed companies have returned an average rate of around 7% yearly since the S&P 500’s founding in 1928. The average interest rate for credit card accounts that charge interest is 15.54 percent, according to the Federal Reserve.
While some cards may offer 0% APR for a brief period, rates might rise to 25% or more depending on the card, the cardholder’s credit score, and their payment history. There is almost no profit in purchasing stocks on credit unless the card account is kept current.
9. Business Startup Expenses
It can be a terrible idea to use your personal credit card to finance startup expenditures or business expenses. A firm typically needs at least a few years to turn a profit, and during that time, you could be paying astronomically high interest on debt that you can’t afford to repay.
Perhaps acquiring a small business loan is best for you. Interest rates on credit cards are often higher than those on conventional loans.
An even better thought is to see if you can raise money from friends and family or through a crowdfunding website.
10. Paying Your Taxes
Although it is possible and legal to pay taxes with a credit card, there is a compelling argument against doing so. Your payment processor will probably assess a convenience fee of about 2% if you choose to use a credit card. If you owe thousands of dollars to Uncle Sam, the fee mounts quickly.
Federal law forbids the IRS from accepting credit card tax payments directly; nevertheless, the government has agreements in place with three private companies to receive and forward such payments. The additional costs for using a card range from 1.87 to 1.99 percent of the total amount paid. For instance, the additional charge would be around $100 if you owe the IRS $5,000. Additionally, not all IRS forms (though the most popular, the 1040, can), and the quantity of payments permitted through this method each year is restricted.
With integrated e-file and e-pay features, tax preparation software also accepts credit cards, but the interest rates may be even higher (2.49 percent for TurboTax, for instance).
An IRS installment arrangement, which distributes payments over up to 72 months, might be preferable to using plastic when taking processing costs and interest into account. There is a setup cost associated with these agreements, and monthly assessments of compounded interest and penalties are made. These choices might still be less expensive, though.
11. Paying Medical Bills
Why add interest to the initial sum when medical expenses may be shockingly enormous even with insurance and are the main reason for personal bankruptcy in America?
With patients or their families, hospitals and medical offices routinely set up interest-free payment plans or even renegotiate prices. Even for patients who are above the poverty threshold, the majority of hospitals offer financial aid programs.
It doesn’t make sense to charge the debt even if you can’t come up with a plan to pay it off. Late or unpaid payments are typically not taken into account when assessing credit scores since healthcare providers typically do not disclose medical debt to the three major credit bureaus — Experian, Equifax, and TransUnion.
New regulations implemented in 2017 established a 180-day waiting period before the debt appears on your credit report, and it completely vanishes the moment the obligation is discharged. This is true even if the debt has been turned over to a collection agency.
12. Small Indulgences
Every time you stop at the deli for a cup of coffee or a sandwich, it’s simple to pull out your credit card. You might get benefits like free money or airline miles based on the cash-back or rewards credit card you use for your transactions.
However, if you use your credit card for every little purchase, your amount could balloon out of control, making it more difficult to pay it off or even make the minimum payment. You’ll be left questioning whether those 20 lattes were actually worth the extra money at the end of the month.
Consider utilizing cash to make minor, discretionary purchases rather than your credit card. Because you’ll probably spend more carefully if you have to reach into your wallet every time you make a purchase, it will not only prevent you from running up your credit card balance but also help you stay to a budget.