Many of us rely on credit cards for big purchases or for those financially rough times when we need to make it to payday. Others use cards regularly in order to rack up rewards.
There are a lot of articles about proper credit card use. Some experts say you should never use credit, others say it’s OK sometimes and a select few recommend using credit cards for every purchase, especially if you have a rewards card. The rules are confusing, so which one is correct?
Most of us don’t pay off the entire credit card balance each month, so that’s when our credit cards work against us. You end up paying interest each month until the balance is paid off. What does this mean? That $500 iPad ends up costing you $1,000 or more by the time it’s paid off. Ready to stop paying so much in interest fees? Avoid using your credit card in these five situations.
1. To pay for big expenses.
This one may be confusing. Isn’t that what your credit card should be used for? To pay for larger expenses that you don’t have the money to pay for upfront? Not necessarily. For larger expenses - like a wedding, vacation or home remodel – a personal loan may be a better option. Personal loans are available through banks and online companies like Lending Club. The rates for a personal loan are generally lower than the rate on a credit card, so you’ll be able to save some cash there. However, if you have a special promotion on your credit card – like 0% for 18 months – then that might be the better deal. Just make sure to pay off the balance within that timeframe or you’ll be responsible for all the interest you accrued.
2. The purchase will max out the card.
Sure, your credit card may have a $10,000 limit, but that doesn’t mean you should buy something that costs $10,000. Why not? First of all, you’ll have to pay interest on that purchase, so once that’s tacked on, you’ll be over your limit. At that point, you’ll be charged additional fees. Not only that, but when you max out your card, you’re looking at a 100% utilization rate. The recommended rate is under 30%. So you’re looking at some major credit damage until you can pay off the balance.
3. To pay taxes.
Nobody wants to have to pay the IRS, but when they do, they often opt for the convenience of paying by credit card. However, you’re charged a convenience fee for using your credit card – typically 2% or more. So for every thousand dollars you owe, tack on another $20 or so. That can add up, depending on how much you owe. Instead, make use of the IRS’ installment plan. You can pay back the taxes you owe a little at a time without going completely broke or having to pay fees on top of it.
4. There’s a convenience fee.
The IRS isn’t the only company that charges convenience fees. Some online payment portals and small local stores may charge fees as well if you decide to use a credit card. Don’t pay to use your card. Those fees will add up. Instead, opt to pay with a check or cash.
5. You can’t pay the balance by the due date.
If you use your credit card properly, you can pay for purchases with an interest-free loan. Just pay off your balance by the due date and you won’t incur any interest fees. Plus, if you have the right card, you can earn rewards or miles on top of that. But if you’re scraping by and struggling to pay down your balances, then you’re digging yourself deeper into a hole. Interest continues to accrue and before you know it, you’ve spent decades paying off your credit card, and you’ve paid the original amount you spent several times over. If you must use your card and can’t pay it off by the due date, then devise a plan so you can pay it off as soon as possible. Don’t let interest fees continue to too long.
Should you use your card or cash? The basic rule is to avoid carrying thousands of dollars in credit card balances. If you have the means to pay off your card every month, then by all means use it as much as you want – just don’t max it out. But it you can’t pay it off, then be sensible. Paying hundreds of dollars a month in interest fe