Your credit card expenses will determine if you are a good or bad credit user. So if you think about it, the credit card is not the problem. These cards can actually do you a lot of good. If you consider its features, you’ll realize that they make life very convenient.
The truth is, credit cards only bring us to financial ruin because of how we decide to use it. The concept of using credit to help with purchases is okay. It was meant to make our financial life easier.
Unfortunately, some people abuse the use of credit cards. That’s why instead of becoming a tool for them to achieve their financial goals, it becomes a hindrance.
This is not to say that most of the credit card debts are caused by irresponsible financial decisions. To be honest, some people were forced into making huge credit card expenses because of circumstances they had to face.
Like the events of 2020, for example. A lot of people were determined to get rid of their debts at the start of the year. But when the COVID-19 pandemic and recession happened at the same time, they were forced to rely on their credit cards to survive. The length of these two events depleted the emergency savings of Americans. Not only that, the increasing unemployment rate made things worse. It’s no wonder the average credit card balance of Americans is now $6,194.
But despite these uncontrollable factors, there are ways for you to keep credit cards from hurting your finances. It all begins with how you choose to use your cards.
Credit card expenses you should never make
If you are a first-time user, you have to learn to choose the right credit card expenses that will benefit you. Making an effort to become a better credit user will help you head off any financial problems in the future. You’ll avoid incurring a huge amount of debt. Not only that, you’ll eventually develop the right financial habits that will help secure your finances – no matter what it’s status is right now.
So what are the expenses that you should never pay using your credit cards?
Rent or mortgage payments
The monthly rent or mortgage payments are usually $1,000 or more. This is a huge amount of money to put on your credit card. The high amount and the credit card’s finance charges are the reasons why you should not use your card to pay for this expense.
If you can’t pay this off in full when the credit card billing statement comes, your balance will be used to calculate the finance charge for the next billing cycle. This charge will be added to your current balance. With the typical high-interest rate of credit cards and the amount you paid for the rent or mortgage, you’ll probably have a significant finance charge. This will make your debt accumulate faster. Now if you can afford to pay your credit card debt within the grace period, then you should have just paid your rent or mortgage in cash. Or you could have transferred it online if you didn’t want to handle the cash. Just don’t use your credit card because it can endanger your finances unnecessarily.
You might be thinking, aren’t credit cards good for large purchases? Yes, that’s true. But these credit card expenses are only acceptable if it is offered with 0% interest rate. That means you’ll be paying it via a fixed-installment scheme. As long as you stick to that, you won’t have to pay additional interest on it.
It’s also advisable that you keep the large purchases from being almost as much as your credit limit. That won’t be good for your credit report. It will affect your credit score negatively. As a first-time credit card user, you shouldn’t be making a habit of maxing out your credit card. If you really need that purchase, make sure you don’t add to the debt until you have paid this one off.
Unfortunately, there are times when people have no choice but to use their credit cards for emergency costs. The ideal scenario is to use your emergency fund first. But if you are dealing with back-to-back emergencies, this fund is bound to run out. What do you do? In this case, you have an excuse to include medical bills as part of your credit card expenses.
But if you’re using your credit card to consolidate medical bills – that’s not a good idea. In fact, it’s considered as one of the things that can make your debt situation worse. You are better off negotiating with the healthcare provider instead of using your card to pay it off. The high-interest rate will only work against you.
Retail therapy purchases
Retail therapy is really not a good idea. You should never buy when you’re feeling emotionally high. Whether that’s a positive or negative feeling, it’s never a good idea. Why? Because you tend to use your emotions to make purchasing decisions. That’s not good if those emotions override logical thinking.
It gets worse when it’s an impulsive buy and you use your credit card to pay it off. That can quickly lead you in a downward spiral towards debt. So if you feel like indulging in retail therapy – don’t. If you convince yourself you’ll just window shop, leave your credit card at home.
Why these credit card expenses are dangerous
You probably found a pattern among these credit card expenses as you read through them. These are dangerous because it can quickly turn from bad to worse.
Here are the different reasons why.
The balance can grow quickly
This is one of the most important reasons why you need to be careful with credit card expenses. The combination of the high-interest rate and its influence on finance charges will work against you. It can make your balance grow significantly – especially if you only pay only the minimum requirement each month. This is the reason why it’s advised that you pay more than the minimum so you can pay off your debts faster.
Affects your credit utilization rate negatively
A good credit utilization rate should not exceed 30% of your credit limit. So if you let your debts reach the maximum limit or you don’t pay your debts accordingly, it can negatively affect your credit score. You don’t want that to happen. Having a bad credit score will keep you from enjoying several financial products. Like if you want to buy your own house, you’ll have a hard time getting the best terms on your mortgage.
Lose back-up funds
Finally, being irresponsible with credit card expenses will make you lose your back-up funds. Or it can make it difficult for you to save up for this fund. Your extra money will be tied up to your debt payments. Unless you can earn more, it’ll be hard to save up for this. And in case something bad happens again, your extra fund will already be compromised.