Never put these expenses on a credit card
Still, debt is to be avoided -- and when it comes to paying for certain expenses, money in the form of cash or a check is better than charging to your credit accounts. Some things are best left off of your credit card bill.
Let's get specific. Here are eight expenses you should consider avoiding charging to your credit card accounts.
1. Tax bills
You are certainly allowed to charge tax payments -- so why shouldn't you? Well, charging isn't free. There are processing fees involved, most of which were recently around 2%. If you use tax prep software that does the e-filing and e-paying for you, then you might be facing a 2.5% fee. So if you're charging a $5,000 tax payment, you may be voluntarily forking over an extra $100 to $125. Isn't writing a check instead worth that? (Using a debit card is another option -- that incurs a flat fee that's probably less than $4.) If you're financially strapped, approach the IRS -- it's not uncommon for the agency to set up payment plans for those who need them.
2. College tuition expenses
If you charge your tuition bill, you're essentially taking out a loan to pay for that tuition, from your credit card company. That's OK if you pay the bill off in full when it arrives, but if you don't, then your debt balance could grow significantly. Worse, interest rates for credit cards are typically higher than what you might find in the student loan market. Also, many schools will charge you a fee for paying by credit card. If you're paying a hefty sum, such as $15,000, and you're charged a 2% or 3% fee, you'll be paying an extra $300 or $450. That could be used to pay for some textbooks instead.
3. Medical bills
It's tempting to pay for medical bills with a credit card, because such expenses often come at you out of the blue when you're not ready with a fat emergency fund. (You really should have an emergency fund.) That's also why you should try really hard to not charge medical bills -- because you may have trouble paying off that debt soon and you can end up drowning in interest payments. Instead, visit the hospital's financial/billing department to discuss your options. You may be able to negotiate a lower bill or set up an installment payment plan.
4. Mortgage payments
As with other sizable expenses, it's not advisable to charge your mortgage payments, lest you be unable to pay the bill off in full each month and start racking up debt on your credit card account. There's another downside, too -- fees that the processing company will probably charge you. If you're making 12 payments of $1,800 each year and are being charged, say, 3% on them, you're paying an extra $648 per year. You probably shopped around to get the lowest interest rate you could find to have the lowest monthly payment you could secure -- so why pay more than you need to now?
5. New cars, used cars
As with mortgage payments, it's best to avoid charging car payments -- or paying for an entire vehicle with your credit card. Remember that if you end up unable to pay your bill when it comes due, you're likely to be facing steep interest payments. If charging the expense of a car is the only way you can see managing to buy it, you'd do well to look for a less expensive vehicle.
6. Cash advances on credit accounts
Clever people might figure out that even though they don't have the cash for a down payment on, say, a house right now, they can get a cash advance on their credit card and become a homeowner that way. Alternatively, they may use a cash advance to be able to afford the kitchen renovation they want or a big family trip to Europe. Well, taking cash advances from credit cards is rarely a clever move -- though it can be an option if you really have no better alternative for an important expense. For one thing, it's common for interest rates to be higher for cash advances than for your regular purchases made on your card.
7. Modest treats
If you're nodding your head at the expenses above and would never charge them, you might nevertheless think it's fine to charge little expenses, such as that coffee you buy each morning or the big soda-fountain drink you buy most afternoons or even the apps you buy on your phone (along with their in-app purchases). Well, those add up and can hurt your ability to deploy your dollars in more important ways, such as socking money away in retirement accounts. Studies have shown that we tend to spend more when we charge than when we pay in cash, so try paying with cash for any treat you can -- and think twice before charging others.
8. Big treats
If you have a large credit limit, that's not an invitation to max it out. Some people charge splurges on credit cards, only to end up racking up debt that then vexes them for years. According to The Knot, for example, the average cost of a wedding in 2016 was $35,329. If you manage to charge that on credit cards with an average interest rate of 16%, you could be paying more than $5,000 in interest annually until you pay it off. That's a crummy way to start off a marriage. Similarly, think twice before charging a honeymoon or any costly vacation.
Being smart about credit means not charging more than you can afford to pay and keeping yourself as debt-free as possible (except for some low-interest rate debt, such as a mortgage). If you rack up big expenses on your credit card account and can't pay it all off, you'll be boosting your total debt, which can hurt your debt-to-income ratio and your credit utilization ratio, in turn lowering your credit score.