Building credit and racking up credit card rewards can be great for your finances, but putting certain items on your card leads to big fees and higher interest rates, which cancel out any benefits.
If you’re smart about what purchases you use credit, you’ll pay fewer credit card fees, save on interest, make it easier to build savings and eliminate your debt. Here are 10 expenses you should avoid putting on your credit card.
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, especially if a cash crunch leaves you tempted to pay your mortgage with a credit card that has a high limit.
Most mortgage companies won’t let you make direct payments with a credit card. Although some third-party companies like Plastiq 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. For example, Plastiq charges a 2.85% fee.
It’s an especially bad idea to circumvent your mortgage servicer by finding a way to pay your mortgage with a credit card 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, and paying more interest on your credit card balance is both expensive and avoidable.
Charging a large amount to your credit card will also lower the amount of credit available to you, which could lower your credit score. This could also happen if you pay your property taxes with credit cards.
2. Small Indulgences
It’s convenient to whip out your credit card whenever you buy a cup of coffee or a sandwich at the deli. And depending on the cash-back credit card or rewards credit card you use for your purchases, you might accumulate rewards like free cash or airline miles. But your credit card balance could grow out of control if you swipe your card for every small purchase, 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 the extra expense.
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 credit card balance, it will help you stick to a budget, because you’ll likely spend more mindfully if you have to dip into your wallet each time you buy something.
3. Cash Advances
A cash advance is a withdrawal or a short-term loan you borrow against your credit card account. It’s best to avoid taking a credit card cash advance because the withdrawal might be subject to high fees and interest rates. Your annual percentage rate and fees will vary depending on your bank and credit card issuer, but in general, the APR on a cash advance is higher than the APR on a purchase.
For example, you might have a credit card that charges a purchase interest rate of 11%-12% and a cash advance APR that’s 25% or higher. You might also pay a transaction fee, which could be a flat rate or a percentage of the transaction amount.
Of course, some situations call for a cash advance — but these should be emergencies only. And always look for credit cards with low rates on cash advances.
4. Household Bills
Can you pay bills with a credit card? Yes, you likely can. But should you?
Some strong arguments exist for putting household bills such as utilities on a credit card. Your power company and water department might let you pay bills online with a credit card for free, enticing you to link your card to the accounts 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 have to remember to pay on time. But the risks often outweigh the benefits.
It’s easy to get into financial trouble if you frequently pay bills with a credit card, especially if you neglect to keep track of your balance. Going over your credit limit and missing payments saddle you with extra interest charges and late fees.
Consider linking your bank account or debit card instead of a credit card, but keep a close eye on your checking account and pay attention to any other bills you’re paying from it. Overdrawing your account might stick you with hefty overdraft fees.
5. Medical Bills
When you don’t have enough money to pay for medical bills, one of the worst things 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 only adds to the cost.
Look for other options if you have large medical bills that you can’t pay immediately. Contact the hospital’s financial office, for example, and ask if you can set up a payment plan or negotiate the charges. Chances are, you’ll pay much less interest to the hospital than your credit card issuer will charge you.
6. College Tuition
College tuition is expensive — it might even outweigh the cost of living, depending on where you live. Broke college students often find it tempting and convenient to pay tuition with a credit card, but resist the urge.
Unless you have a steady paycheck to rely on, you might not be able to pay your credit card bill off before you incur interest. Plus, many schools tack on a convenience fee of 2%-3% for charging the payment.
The bottom line is that it’s not worth it to pay tuition with a credit card, even if you’re having trouble making your tuition payments on time. Talk to someone in your school’s financial aid office for information about low-interest student loans, grants, scholarships or work-study programs that might be available to help pay your education costs.
7. Your Taxes
Although it’s possible — and perfectly legal — to pay taxes with a credit card, there’s an excellent reason why you shouldn’t: your payment processor will likely charge you a convenience fee of around 2% for using a credit card. That fee adds up quickly if you owe Uncle Sam thousands of dollars.
The IRS lists payment processing fees that vary depending on your payment processor. Using a debit card to pay your taxes on PAY1040.com costs a $2.50 flat fee, for example, but paying your taxes with a credit card hikes the fee to 1.87%, plus a minimum fee of $2.50. A debit-card tax payment on payUSAtax costs you a $2.55 flat fee. Using a credit card will incur a 1.96% fee, with a minimum fee of $2.69.
You won’t want to pay property tax with a credit card, either. Convenience fees on tax payments will likely cost you 2%-3% of the tax amount.
Some people claim they used a credit card to pay for a car — and they don’t regret it because they earned tons of points. Perhaps another reason they don’t regret it is because they pay their credit card bill online the minute it comes due, avoiding big interest charges. Don’t rely on this payment method unless you’re confident you can do the same thing.
Considering that your credit card balance makes up 30% of your credit score, carrying a balance that’s too high in comparison to your credit limit might cause your score to suffer. The same is true if you fail to pay credit card bills because you’ve lost control of your account balance.
Lacking the cash funds for a new car suggests you might be better off delaying your purchase. At the very least, find a used or new car you can afford more easily.
9. Down Payments of Any Kind
Don’t rely on using a credit card for a down payment on anything, including a house or a car. It might be a moot point for the house, because you typically can’t use a credit card to pay your house down payment anyway, unless you get a cash advance to pay for it — and 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. Adding a large cost — the credit card’s high-interest rate charges — to the sales price of your item makes a challenging financial situation even worse.
10. 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 you can’t afford to pay back.
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.
An even better idea: See if you can raise money through a crowdfunding website or through friends and family.
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