By manybanking.com Staff
In the last few decades, credit card use has increased exponentially. These days, people charge all kinds of expenses, from clothing to food and gas to travel.
Though convenient, credit cards come with a host of extra worries, including any number of fees in addition to increasingly high interest rates. In the end, using a card in some situations can actually end up causing you more trouble than it’s worth. Here are a few of those situations:
Paying for Basic Necessities
If your finances are such that you need to use credit to pay for food and utilities, something has either gone horribly wrong with your budget, or you have faced some unexpected event. Establishing an emergency fund to cover six months or more of your living expenses is meant to protect from just this occurrence. Unfortunately, many Americans don’t have enough savings to cover their basic needs if they lose their job, so they turn to credit cards.
Using credit cards for basic necessities can signal to credit reporting agencies that your finances are in trouble. If you start charging more or taking cash advances on your card, some lenders will flag your credit. To lenders, this type of behavior shows that money is tight on your end, which makes you more of a risk.
Instead of using your credit card when you’re in this situation, look to trim the fat on your expenses. Do you need to have cable? What about that gym membership? Can you walk or bike to work instead of spending money on gas?
Payments on Mortgage, Auto and Student Loans
In general, credit cards should not be used for large expenses because of their high interest rates. Most credit cards carry interest rates above mortgage, auto and student loans, which means you will end up increasing your rates on these loans. Additionally, lenders often do not accept credit cards for monthly payments. In order to use one, you’ll have to go through a middleman, and that will cost you an additional transaction fee (usually 2% - 2.5%). The fee will probably offset any potential gains you could have made by using a rewards credit card.
Additionally, you have to consider the damage of using one debt to pay off another. As a one-time thing, it may not be so bad, but you don’t want to get in the habit of shuffling debt, as all debt has to be eventually repaid. The more you shift your debt around, the more it will continue to grow.
Paying the IRS
The IRS accepts millions of tax payments by credit cards each year, but that doesn’t mean it’s a good idea. Like loan payments, payments made to the IRS with plastic have to go through a middleman, who typically charges 2.49% in convenience fees. Of course, on top of that, you’ll have to pay the normal credit card interest. If you can’t pay your tax bill, it may make more sense to work out a payment plan with the IRS. The IRS only charges 7% in interest, and they will help you pay off what you owe sooner than you think.
If you have no other alternative to using a credit card for a large expense, make sure you choose one with the lowest possible interest rate. If you can qualify for a new card with a low introductory or balance transfer rate, all the better. Whatever you do, try to pay off the balance as soon as possible and start saving to prevent the next crisis.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.