Don’t have the money in your checking account or the cash on hand to pay for some sort of bigger purchase? Chances are you’ve just come to pulling out your credit card to proceed with the transaction. After all, it’s the convenient, easy option, and with outstanding credit card debt having recently surpassed the $1 trillion mark, it’s something that a lot of Americans are doing.
Paying for items, no matter how big or how small, isn’t necessarily a bad thing — especially if you can pay it off and not carry a balance from month to month that accrues interest. You’re also likely racking up reward points each time you use your credit card for purchases, which can be a nice incentive. Finally, you’re adding to your credit history, which is part of how your credit score is calculated.
Despite these positives, there can be some downsides to using your credit card, especially on big purchases. For one, your amounts owed goes up, which can impact your credit utilization ratio, or debt-to-credit ratio. Generally, you want to keep this credit utilization ratio at about 30 percent of your total credit limit for the best possible credit score. Large charged purchases can certainly impact that. More importantly, however, expensive purchases tend to take longer and be more difficult to pay off.
This is a good segue into the things that financial experts say you should never use your credit card for, despite how tempting it might be:
#1: Taxes
If you owe money to Uncle Sam, don’t bust out your credit card to settle your debt with the government. Why? Because the IRS typically charges a processing fee of up to 2 percent, so you’re essentially paying interest on top of the taxes that you already owe. Plus, there’s a couple of super easy ways to avoid using your charge card for tax purposes. One, you can ask the IRS for a payment plan, where you can settle your debt in regular installments. You’ll get dinged on interest for this, but not nearly as much as the 2 percent we mentioned above. The other option is to talk to your bank or credit union about a taking out a personal loan.
#2: Tuition
College is expensive, and it’s just getting more expensive. But, getting your credit card out to pay for tuition, room and board is a really bad idea. For instance, with how expensive it is, it can really raise your amounts owed and credit utilization ratio. Plus, charging tuition will likely sock you with an additional 3 percent service charge. Additionally, there are several better options for paying for college. One is student loans, where interest rates are typically much lower than those of credit cards. Another is to set up a payment plan with the university, where you can break up payments into smaller, regular amounts.
#3: Your Mortgage
Most mortgage companies won’t even accept credit cards as a form of payment, which is a good thing. The bad news is that various third-party services will allow you to pay them via credit card, and then they’ll pay your mortgage. Stay away from these mortgage middlemen, as you’ll be paying a hefty service fee on top of what’s likely already one of your biggest regular expenses. If you can’t make your mortgage payments without using a charge card, it’s time to reassess your living situation and/or your consumer habits.
#4: Medical Bills
If you have medical debt, the last thing you should be doing is paying it off with a credit card. There are many reasons for this. One, there’s the fact that most medical facilities and providers are happy to set up payment plans to keep costs more manageable. Then, there’s also the fact that medical debt isn’t weighed as heavily when it comes to calculating a credit score as it once was, so there really shouldn’t be a big rush to pay off such debt.
We challenge you to think a bit more about what you use your credit card for in the future, as making the wrong purchase on it could really cost you – both in the short-term and long run.
Regards,
Ethan Warrick
Editor
Wealth Authority
