It can be tempting to use a credit card to pay for expenses you usually wouldn’t (or couldn’t) pay for with cash or a debit card. But, whether you’re working to pay off debt or want to stay out of credit card debt, it’s best to avoid using your card for anything you can’t pay off before you begin accruing interest.
To be clear, I’m not saying that the following purchases absolutely should not be put on a credit card. After all, here at The Points Guy, we are all about earning rewards. But, it’s best to use credit cards responsibly. As such, you’ll generally only want to put the following types of purchases on a credit card if you pay off your statement balance in full each month or if you have a 0% APR offer and will be able to pay off your balance before the promotional period ends. And you should consider whether any surcharge you’d incur for using a credit card is worth the rewards you’d earn.
Now, let’s dive in and consider some potentially troubling credit card purchases that you may want to avoid.
Taxes
If you owe taxes to the federal government, you can pay using various methods for no additional fee. For example, you won’t need to pay any processing fees to pay your taxes if you mail a check or use Direct Pay from a bank account.
You can also pay your taxes with a credit card. But, you’ll pay a fee between 1.96% and 1.99%, depending on the processing service you choose. Although no credit card bonus categories cover tax payments, some everyday spending credit cards may provide a high enough return to justify using a credit card — assuming you can pay off your balance before accruing interest.
If you aren’t able to pay your balance before accruing interest, it may be better to use one of the options provided by the IRS. For example, you could apply for a payment plan, ask for an offer in compromise or request that the IRS temporarily delay collection until your financial situation improves.
Medical bills
When you receive a medical bill, it can be tempting to simply put it on a credit card to consolidate your debt. And it’s possible to earn ample points and miles on healthcare spending. But, if you won’t be able to pay your balance in full before you start accruing interest, you should consider your options before charging these expenses to your credit card.
First, check that the medical bill is correct and any insurance you have has been factored in. Then, if you cannot pay the bill outright, it may be worth calling the number on your invoice to discuss your options. You may be able to negotiate a lower payment or a payment plan that will charge you less interest than your credit card APR. Some medical providers may even be willing to set up an interest-free payment plan.
Tuition
Some schools allow students and their families to use credit cards to pay tuition. If you’re able to pay your credit card balance off in full before you start accruing interest, paying tuition with a credit card can be a great way to rack up rewards. Otherwise, you’ll want to consider other options.
Many schools offer monthly payment plans as well as merit and need-based scholarships. You may also be able to apply for a student loan with a low-interest rate — but you’ll want to pay this loan off before the interest rate increases.
Student loans
If you took out student loans to pay for school, you might now have a large amount of debt that continues to accrue interest. You typically can’t use a credit card to directly pay your student loan payments with the student loan servicer or lender. And, even if you can use a credit card, you may face transaction fees or cash advance fees. Likewise, you could use a third-party payment service such as Plastiq, but these services also charge transaction fees that may outweigh any rewards you’d earn.
So, if you want to use a credit card to pay your student loans, you should consider the fees involved in doing so. Also, make sure you’re able to pay off your credit card in full before you start accruing interest on the balance. Alternatively, you may be able to refinance and consolidate your student loans to obtain a lower interest rate, especially if you have good credit. Or, you may want to consider whether your student loan is eligible for income-driven repayment, deferment or forbearance.
Monthly rent or mortgage payments
It is rare to find a way to pay your rent or mortgage with a card without paying additional fees. Instead, you’ll usually need to use a third-party service provider like Plastiq if you want to pay your rent or mortgage with your credit card. You can generally expect to pay a fee of 2.5%-3% for this service. So, even if you can pay off your statement balance in full before you begin to accrue interest, the rewards you’d earn may not justify the fees you’d incur.
Cash advances
Although many credit cards advertise that you can withdraw money from an ATM using your card and send you convenience checks, you’ll usually pay a cash advance fee when you use these services. Plus, you typically won’t earn points on transactions that code as a cash advance. But you will start accruing interest — often at a high APR — as soon as you get a cash advance.
So, you should avoid cash advances. If you need cash now, it’s better to use your debit card to withdraw money or borrow money from a friend or family member.
Large purchases that put you close to your credit limit
Credit cards can be useful for making large purchases, especially if you have access to a 0% APR offer. But, one downside to making a large purchase using your credit card is that you’ll increase your credit utilization ratio. Your credit utilization ratio is your current amount owed over your available credit. Generally, you should keep this ratio below 30%.
So, when you make a large purchase that puts you close to your credit limit, your credit utilization will increase, which may cause your credit score to decrease. Of course, if you pay off your credit card balance quickly, the long-term effect on your credit score will generally be insignificant. But, you also face an increased risk of going over your credit limit as your balance approaches your credit limit.
Impulse splurges
Unaccounted-for splurges are an easy way to end up with a higher credit card bill than you expected. Impulse splurges will involve different types of purchases for each of us, such as sporting equipment, clothing, shoes or trips. If you have the finances to cover these splurges, they may be just an inconvenience to your budget.
But, if you’re short on money or already in debt, impulse splurges can cause you issues and should be avoided. To reduce impulse splurges, you may want to make a budget, avoid shops or situations that usually lead to impulse purchases and only provide yourself a set amount of cash each month for fun purchases and splurges.
Gambling
The primary issue with using a credit card for gambling is that banks typically code gambling as a cash advance. After all, most credit cards consider gambling charges to be a cash equivalent, regardless of whether you use your credit card to fund online gambling or at a casino to withdraw cash. As discussed earlier, cash advances usually incur fees and you’ll start accruing interest immediately on the amount of the cash advance. So, you’ll generally want to bring cash or use your debit card to fund any gambling you plan to do.
It’s also worth mentioning that it can be easy to get caught up in the gambling experience and spend more than you can afford. So, it’s best to set a maximum that you will spend while gambling and stick to this limit. And, if you can’t stick to your limit, it may be best to avoid gambling altogether.
Wedding expenses
Weddings are one type of event where some consumers are willing to drop a lot of money. But, you won’t want to put your wedding expenses on a credit card if you won’t be able to pay it off before you start accruing interest.
Assuming you have the savings or income to pay off your wedding expenses, one method of funding your honeymoon is to use the Capital One Venture Rewards Credit Card. With this method, you use the Capital One Venture to pay for wedding and honeymoon expenses and then use the rewards earned to offset your travel expenses.
You could also consider saving up or having a lower-cost wedding. Or, if you are starting a new, higher-paying job after your wedding, you could use a 0% APR credit card to pay for wedding expenses and then pay off the card before the end of the 0% APR period.
Vacation
Vacations can be an excellent way to recharge and reconnect, but they can also get expensive. You shouldn’t pay for your vacation using a credit card if you won’t be able to pay off the balance before you begin accruing debt.
Instead, you could take a vacation on a budget or take a less expensive staycation. Or, you could save up points and miles earned on everyday purchases to take a break once your balance is high enough to cover most expenses.
Vehicle purchase
If you want to purchase a vehicle, it can be tempting to use a credit card to earn rewards for some or all of the vehicle purchases. But, you’ll only want to use a credit card if you’ll be able to pay off the balance before you start accruing interest. Otherwise, you’ll end up paying an interest rate many times higher than what it would cost to finance the vehicle.
Discretionary spending
Whether you’re looking at a new TV or a luxury vacation, you should avoid putting discretionary purchases on a credit card if you won’t be able to pay off your credit card balance in full. Instead, it’s better to save up the money you need before making the purchase. This way, you can avoid paying interest on your balance while you work to pay off the expense.
Of course, once you have the necessary money saved up, you can put your purchase on a credit card to earn rewards. Just be sure to pay your balance in full when you pay your credit card bill.
Bottom line
Credit cards can provide valuable rewards that can put cash back in your wallet or fund amazing trips. But, if you’re paying interest on your credit card balance, these rewards won’t be worth the interest you’re paying. So, a general rule of thumb — especially for non-essential purchases and purchases that you can finance at less-expensive rates through other means — is to only use your credit card if you’ll be able to pay off the balance in full before you start accruing interest.
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