There are smart ways to use your credit card: you can keep your wages earning interest in a savings account while you spend on your credit card and pay it off at the end of the month, you can even accumulate meaningful points or take advantage of cash-back offers. However, there are times when using on your credit card is going to cost you more than the purchase could ever be worth. Here are five situations where you should not use your credit card:
1. Don’t take your credit card for a night on the town
When you have a big date (or just a big night out with friends) planned, it can be easy to burn through your cash as you pay for drinks, dinner, dessert, or entrance fees, drinks, drinks, and drinks. But what happens when your money runs out at the end of dinner or after the second round of drinks and the night is still young — plus you have to be able get home?
It can be tempting to lay down your credit card and start a tab, but you are going to end up with much more than a headache and a woozy stomach in the morning. You’re going to have a credit card hangover too, and those can’t be placated with a few aspirin and a greasy breakfast. Instead, think about the interest you will be paying on all those rounds, and all the rounds you shouted your ‘new friends’ in the excitement of the evening; is a monster hangover really worth a credit card hangover?
2. Don’t use credit to pay bills
If you have lost your job or are just having trouble making ends meet, a credit card is not the answer. A credit card may solve your problems in the short term, but it is really only making things worse for you down the track. If you don’t have enough money coming in to keep your household running, then you need to find another way. A way that isn’t going to add another bill to the list at the end of the month, and one which will not charge you interest, making it harder for you to ever pay off your credit card debt.
Instead, look at where you can cut back on your costs — can you live with just one car, can you cook at home more than eating out, can you cancel gym memberships and walk more? Then you can contact your bank, the electricity and water companies, and anyone else you owe money to and explain the situation. Chances are you can negotiate more time to pay your bills and even a payment plan for the long term to make things more affordable, without accumulating bad debt.
3. Don’t bet on credit
Online gambling sites make it easy — not to mention fun, at the time — to simply enter your credit card details and try your luck. However, you can lose a lot more than just chips when you gamble with your credit card. On top of losing an online game of poker or roulette, you are losing someone else’s money — the bank’s, and they are going to want to be repaid, with interest.
4. Don’t start a marriage on credit
If you are swept up in the romance of a proposal, you may not think twice about putting the perfect engagement ring on your credit card. However, you should be thinking twice (and three times!) about starting a marriage based on debt — just how long is it going to take you to pay off that ring? How much interest is that ring going to have accumulated before you can pay it off? Not to mention the other debts a young couple has to worry about — student loans, a mortgage, car loan…
Instead, find a way to keep your credit card away from the engagement ring. You don’t want to scrimp on the one you love, but consider borrowing the money from your parents or even better, find out whether there is a family engagement ring which was destined for your fiancÃ©e’s finger anyway. Otherwise, explain to your girl that you don’t think it makes sense to start your life together in bad debt, and buy a smaller ring. You can upgrade the ring when you can afford it — have the original diamond reset with a larger one, or put in a more expensive setting.
5. Don’t pay for your taxes on credit
It seems like a good way to earn some credit card rewards points for a bill you have to pay anyway! But paying your tax bill on your credit card can cost you more up front, on top of the interest if you don’t pay it off right away. This is because the IRS is prohibited from paying fees to credit card companies to process their transactions. When you use your credit card to pay for anything, the person you are paying is being charged merchant fees from your credit card company to process that transaction. Most businesses will absorb those fees as part of the cost of doing business so you won’t even notice. However, the IRS is prohibited under the Taxpayer Relief Act of 1997 from paying those merchant fees to the credit card companies, so they charge those fees to you. Therefore, on a $4,000 tax bill, you would actually pay $4,099.60 to cover the service charges. Does paying an extra $100 on your bill equate to enough rewards on your credit card scheme?
As well as the service charges you will have to pay, think about the interest that will accumulate on your tax bill if you don’t pay it off within the interest-free days. It’s bad enough paying tax, do you want to keep paying for it month after month in credit card payments?