Even though building credit and racking up credit card rewards can be great for your finances in general, there are some things you should never put on your credit card because you can incur big fees and higher interest rates. Avoid putting the following expenses on credit cards so that you don't end up making it harder for yourself to get out of debt.
1. Mortgage Payments
If you've ever wondered, "Can I pay my mortgage with a credit card?", the answer is maybe, but that doesn't make it a good idea. If you're low on cash one month, it might be tempting to pay your mortgage payment with a credit card that has a high credit limit. But there are problems with this thinking.
For one, some mortgage companies won't let you make direct payments with a credit card. Although some third-party companies will help you use your credit card to pay your mortgage, they often charge fees for this convenience — which will just add to the amount you're paying in bills each month.
Should you be able to circumvent your mortgage servicer and find a way to pay your mortgage with a credit card, it's still a bad idea if you don't plan on paying off your credit card balance in full each month: You're already being charged interest on your mortgage, so paying more interest on your credit card balance is both expensive and avoidable.
Lastly, charging a large amount to your credit card will lower the amount of credit available to you, which could lower your credit score. This could also happen if you choose to pay your property taxes with credit cards.
2. Small Indulgences
Sure, it can be convenient to whip out your credit card whenever you buy a cup of coffee or a sandwich at the deli. And sometimes, depending on the cash-back credit card or rewards credit card you use, you're even rewarded for purchases with free cash or airline miles.
But if you swipe your credit card for every small purchase, your credit card balance could grow out of control. And the higher your balance, the harder it will be to pay off or even afford the minimum payment. At the end of the month, you'll be left wondering if those 20 lattes were really worth it. Plus, some store owners will charge a fee if you use your credit card to purchase items under a certain amount of money, typically less than $5.
Instead of using your credit card to pay for small, discretionary items, consider using cash. Not only will it save you from running up your balance, but it'll help you stick to a budget. By only using cash for small purchases, you'll likely spend less.
3. Cash Advances
A cash advance is a withdrawal or a short-term loan in which you're borrowing against your credit card account. If possible, avoid taking a credit card cash advance — or else you might be subject to high fees and interest rates. Your APR and fees will vary depending on your bank and credit card issuer, but in general, the APR on a cash advance is higher than a purchase APR.
For example, you might have a credit card that charges a purchase APR of 11.00% or 12.00%. However, the APR for cash advances might be 2 or 3 percentage points higher. And, your fees might equal $10 or a small percentage of each transaction — whichever is greater. This is why many personal finance experts highly discourage getting a cash advance from your credit card.
Of course, some situations call for a cash advance — but these should be for emergencies only. And always look for a credit card that offers low interest and fees for cash advances.
4. Household Bills
Some strong arguments exist for putting household bills — such as utilities — on a credit card. Your department of water and power, for example, might let you pay your bills online with a credit card without being charged a fee for the service. So it might be tempting to link your credit card to the account to get rewards. And if your servicer lets you use automatic payments to pay your bills with a credit card, that's one less bill you don't have to remember to pay on time.
Still, relying on credit cards to pay too many of your household bills could get you in financial trouble, especially if you have a bad habit of not checking your credit card balance, which could lead to a missed credit card payment, interest charges and late fees.
Consider linking your debit card instead. But again, make sure you regularly watch your checking account. Otherwise, your balance might fall into the negatives if you don't have enough money in your account to cover your bills, and you might get stuck having to ask your bank to waive overdraft fees.
5. Medical Bills
When you don't have enough money to pay for medical bills, one of the worst things that you can do is put them on your credit card. Medical care is expensive, and paying for it with a credit card that charges high interest on top of this is could be a bad idea.
If you have large medical bills that you can't pay immediately, don't automatically pull out your credit card. Instead, contact the hospital's financial office and see if you can set up a payment plan or negotiate medical bills. Chances are, you will be paying much less in interest to the hospital than your credit card issuer will charge you.
6. College Tuition
College tuition is expensive. In fact, it might outweigh the cost of living, depending on where you live. If you're a broke college student, it can be convenient to pay your tuition with a credit card, but think again.
If you don't have a steady paycheck to rely on, you might not be able to pay off your credit card before you incur interest. Plus, many schools will tack on a convenience fee of 2 percent or even 3 percent for paying your tuition with a credit card.
Bottom line: It's not worth it. If you're having trouble making your tuition payments on time, talk to someone in your school's financial aid office. They'll fill you in on the types of low-interest student loans, grants, scholarships or work-study programs available to you to help pay your education costs.
7. Your Taxes
Although it's possible — and perfectly legal — to pay your debt to Uncle Sam with a credit card, there's an excellent reason why you shouldn't: Your tax processor will likely charge you a convenience fee of around 2 percent for using a credit card. If you owe Uncle Sam thousands of dollars, a 2 percent fee can really add up.
The IRS currently lists fees that vary depending on your payment processor. If you use a debit card to pay your taxes via Pay1040.com, the IRS states you'll be charged a $2.59 flat fee. But if you pay your taxes with a credit card, the fee jumps to 1.87 percent, with a minimum fee of $2.59. Meanwhile, paying with a debit credit via PayUSAtax.com requires a $2.65 flat fee; using a credit card will incur a 1.98 percent fee, with a minimum fee of $2.69.
Some people claim to have used a credit card to pay for a car — and they don't regret it, partially because they earned tons of points after doing so. Additionally, Consumer Reports advises that you pay your car down payment with a credit card because if the auto dealer goes out of a business, you can challenge the payment with your credit card issuer.
Still, don't resort to this payment method unless you're confident you can afford it and possibly high-interest charges. If you don't have enough money for a down payment, perhaps you should delay your car purchase or find a used or new car you can afford more easily. Ask a financial advisor and speak with the car dealership first to make sure they'll accept your credit card payment.
9. Down Payments of Any Kind
Reconsider using a credit card for a down payment on anything, including a house or a car. For one, you can't typically use a credit card to pay your house down payment. You can, however, use it to get a cash advance to pay for it — but that's not a good idea either.
If the only reason you want to use a credit card for a down payment is because you can take advantage of your card's high credit limit, that might be a sign that you can't really afford the down payment. And if you don't have the money for the down payment on a loan, don't get the loan. Otherwise, you're just adding a large cost to the sales price of your item — the high-interest rate charges.
A large purchase like a down payment can dramatically change your debt-to-income ratio, which can lead to a change in your credit score. If your credit card balance is too high in comparison to your credit limit, your credit score might suffer. The same is true if you miss payments because you lose control of your account balance.
10. Your Business Startup Expenses
Using your personal credit card to pay for business expenses or to finance startup costs can be a bad idea. It generally takes at least several years for a business to become profitable, and in the meantime, you might be paying extraordinarily high interest on debt that you cannot afford to pay back immediately. And if your business fails, you might be in deep credit card debt.
Sure, there are some upsides to using a credit card for business expenses. But if you do need to borrow a lot of money to kick off your business, you might be better off getting a small business loan. Interest rates on credit cards are typically higher than rates on traditional loans, according to Entrepreneur.com.
An even better idea: See if you can raise money through a crowdfunding website or through friends and family.