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- It’s not a good idea to put large expenses you can’t pay off in a reasonable time on a credit card.
- You could end up paying loads of interest and incur unmanageable credit card debt.
- Putting car payments, mortgage or rent, or tuition on a credit card could land you in trouble.
- Read Insider’s guide to the best balance transfer cards.
For the past year, I’ve been extra mindful about what I’m putting on my credit card. When the pandemic hit, I wanted to be careful with my finances to make sure I was saving more than spending. That meant updating my budget (to meet the changing costs associated with staying at home) and making sure I wasn’t overspending or overusing my credit card.
It also made me realize that if an emergency in my life did happen during this pandemic (whether associated with health, home, or major income loss) I’d have to rely on my credit card even more. To help plan for the unexpected, I began to wonder if there are expenses that shouldn’t go on a credit card.
After chatting with financial experts, I learned about the five expenses that don’t always make sense to end up as part of your credit card balance.
In the past, I’ve used my credit card to pay for smaller medical bills (after annual physicals or even for procedures that cost a few hundred dollars) but I wondered if it would make sense, in case of an emergency, to charge a hospital bill or a larger medical expense?
R.J. Weiss, a CFP, suggests that it might not always be the best idea to pay for medical bills using your credit card.
“You should avoid paying medical bills in full on your credit card when you’re likely to carry a balance,” says Weiss. “Medical providers often allow you to pay in monthly installments at either a zero or much lower interest rate than your credit card company.”
In the future, if you’re facing a costly medical bill, Weiss recommends first negotiating the bill and then working out a payment plan with the medical provider. If you can pay in full, Weiss shared that you might be able to get the full price lowered. All of these options might be better than carrying that large bill on your credit card balance with a higher interest.
During the pandemic, a lot of my friends ended their rental leases and bought houses outside of New York City. Many of them, for the first time, began paying a mortgage. I wondered, if I eventually followed in their footsteps, how I’d pay that monthly price (cash or credit card).
“The temptation of reward points can be great, but sometimes there can be other service fees involved,” says Laibson. “Or worse, if you cannot pay it off right away, you could start accruing interest right around the same time the next rent payment comes in, and so on.”
Laibson recommends that before you take out a mortgage, make sure the payments are something you can afford every month, without the help of a credit card.
“Avoid this by making sure your housing costs are no more than 40%, or at most 50% of your income, and creating a cash savings plan to cover you if you have no income for a period of time,” Laibson says.
Another major expense, that lingers for a handful of years, is school tuition. Whenever I dabble with the idea of going back for another degree, I think about how I couldn’t pay for the tuition with just cash. Would school tuition go on a credit card?
Laibson shared that education expenses are often unavoidable, but these expenses can devour available credit very quickly and be difficult to pay down for a student.
“There are often extremely high interest rates applied to these balances that make it even harder to repay,” says Laibson.
If you’re thinking of going to school and wondering how else you can pay for your tuition, Laibson recommends looking for other funding methods, such as student loans or grants.
Vacations, weddings, entertainment
When I was planning my wedding, I often put so many items on my credit card without even thinking (vendor deposits, decorations, etc.) and before I knew it, my spending was more than I had initially planned.
May Jiang, a CPA and CFP, shared that you want to try not to put these big-ticket items on credit cards because you might have to pay high interest to the credit card companies for these expenses.
“So the best way to budget for these discretionary expenses is to set up a Fun money account, a checking or savings account,” says Jiang. “You can set up an auto-deposit so you can deposit 1% (or a certain amount your budget allows) of your income directly into this account. This can be done with your payroll office. If there’s no money in this account, then you can’t spend any discretionally.”
One final thing to try not to charge to your credit card is car payments.
Aviva Pinto, a wealth advisor, shared that she recommends you never charge your car to a credit card — or even the down payment unless you have the cash at month’s end to pay it in full.
“Credit cards are still charging 16% APR. If you pay for a car (assume $30K) and cannot pay it in a month when the credit card bill is due, you are racking up a ton of interest payments,” says Pinto.
Instead, Pinto recommends considering other options, such as taking out a loan at a bank or financing it with the car company’s finance arm.