Credit cards are useful financial tools. They can fund large purchases, build credit and help consumers establish financial independence. But they can also get cardholders into major financial trouble when used improperly. Not all credit card purchases are created equal, and some should be completely sidestepped to avoid unmanageable credit card debt.
Not only can that debt stress you out, it can hurt your credit scores, which can limit your ability to get future credit for things like a mortgage or an auto loan. You can see how your current debt is impacting your credit using our free credit report summary. It provides you with two of your credit scores, completely free and updated every 14 days, plus a summary of how you’re managing your credit in five key areas.
Here are five ways you probably don’t want to use your credit card if you want to be better equipped to manage your credit card balance.
1. Pay Monthly Utilities
Paying monthly utility bills may be especially appealing to cardholders with rewards credit cards — after all, those bills are another way to maximize rewards. In that scenario, it could make sense to pay your bills using a credit card.
But many companies charge convenience fees to pay with a credit card, so you’ll end up paying more than necessary. If you can’t pay off the bill balance in full each month, you could end up paying a lot in interest charges. As interest accrues and your bills continue to stack up, it could become very easy to fall far behind.
If you’re having trouble paying your bills, you might be better off reducing your spending or working with your service providers to come up with an alternative payment plan.
2. Pay College Tuition
There are many ways to pay for college. Student loans, scholarships and part-time jobs can all fund your education. These options are either free or far cheaper than using a credit card. If you wince at the idea of taking out a student loan, remember that a loan will come with much lower interest than a credit card payment. What’s more, most student loans are deferred until after graduation, while you will making monthly payments on your credit card debt almost immediately.
3. Settle Tax Debt
If you find yourself with an unexpected debt to the IRS, it could be tempting simply to charge it. This is usually a bad call.
Paying the IRS with a credit card may result in a convenience fee, and unless you can pay off the balance immediately, you’ll wind up paying interest on that debt quickly. The IRS offers a number of solutions for taxpayers with substantial tax debt, including repayment programs and settlements for less than the original amount owed.
4. Take Out Cash Advances
Cash advances let you take out cash against your credit card balance, but can be far more expensive than the ATM fee you’d pay using your debit card. The cost varies, but some credit cards will charge you a one-time cash advance fee and even an ATM fee if applicable. What’s more, most cards charge a higher APR for cash advances, and you start accruing interest immediately.
The only time a cash advance may make sense is in the case of an emergency where your only alternatives are over drafting at your bank or taking out a payday loan. Even then, it’s a good idea to try to avoid all these scenarios.
5. Charge Your Business Startup Expenses
If you’re starting a new business, you may have a lot of upfront expenses. But the problem with using credit cards to fund your startup is that it could take years for your business to succeed and turn a profit. During that time, you could end up paying thousands of dollars in interest. And if your business fails you’ll still be stuck with credit card debt.
You may be better off finding alternate sources of funding, which could include small business loans or investors.