Credit cards can be confusing, but learning what not to buy with one is essential to your credit. Building credit using credit cards can be great for your credit, however, certain items may lead to bigger fees and higher interest rates. Credit cards are a powerful financial tool and should be used mindfully to avoid the cycle of debt trap.
Avoid placing the following expenses on credit cards:
Mortgage or rent
Most mortgage companies or rental agencies won’t let you make your payment with credit cards. Even though some third party companies will help you for a large fee, this doesn’t make it a good idea. By the end of the month you will have compounded your mortgage interest and credit card interest making it very expensive and almost inescapable to overcome. Your mortgage or rent should always be your number one priority to pay each month, but try not to use a credit card for your payment.
Household Bills/household Items
Some utility companies will let you use your credit card for payments with no fees, while others charge a $1-2 service fee. Either way it makes it easy to link your credit card to your utilities each month and not worry about them. These risks often outweigh any benefit of using your credit card. Going over your credit card limit or missing payments can put you into financial difficulties and cause extra interest charges or late fees. Paying household items on credit cards such as groceries, personal care items or cleaning supplies is also not the best idea. Purchasing these items will cost you a lot more in the future with interest. Instead, link your checking account or debit card to your utility company and cut your household bills where you can.
Small indulgences or vacation
Everyone needs a little extra pick-me-up from time to time. Credit cards offer a convenient way to purchase a cup of coffee or a sandwich from your favorite sub shop. If you use your credit card for every small purchase, you’ll be surprised by how much your balance will grow. Additionally, if you finance your vacation with credit, more often than not you will return to more difficulties than before you left because of increasing financial stress. A better option is to save for your vacations leading up to it.
Down payment, cash advances or balance transfers
A good rule to abide by is to not rely on a credit card for any kind of down payment. It will add to a larger cost and may be a sign that you shouldn’t make the purchase. In addition, cash advances usually charge a higher rate than purchases.
Treatment costs can be expensive and when you don’t have enough money to pay for them, you might think it’s a good idea to put them on a credit card. Instead, shop around prior to getting treatment and find out how much your insurance will cover. Paying for any medical bill with a credit card that charges high interest rates will only add to your total cost. Most healthcare providers will be able to adjust rates and offer repayment plans with less interest charges.
Planning a wedding is not an easy task. One of your first challenges as a couple is to budget for your big day. To avoid beginning your married life with wedding debt, open a savings account and start placing funds into it every pay day.
When faced with a large liability like taxes, it may be tempting to charge it, but do you know that the processor will usually charge a fee of between 1.88 and 2.35 percent on top of your scheduled payment? The IRS will allow you to setup a payment plan with a more competitive interest rate.
Student Loans or tuition
College is expensive and college students are tempted to use credit cards as a convenient way to pay for college tuition while waiting for their financial aid. Instead of using credit cards, education can be funded through lower-interest student loans, scholarships, grants and full or part-time jobs.
A good rule of thumb to abide by is if you can’t pay it completely off each month, don’t put your purchase on plastic. Credit cards are important to your financial health but how you use them will determine the outcome.