Credit cards are powerful financial instruments, but cardholders must use them carefully to avoid becoming trapped in a cycle of debt. At the same time, it can be difficult for cardholders to contemplate a huge expense knowing that a bank has already extended them sufficient credit to just charge it.
Yet a credit card is often the worst means of finance. Credit card debt is unsecured and typically carries a higher interest rate than a car or home loan. And unlike a home mortgage or student loan, credit card debt is never tax deductible. Of all the things financed with credit cards, here are the five worst.
Many adults can trace their debts back to their college years when they didn’t fully appreciate how difficult it would be to pay off credit card charges, especially after interest starts to compound. And in many cases, college graduates aren’t able to land a job as soon as they hoped, or they have insufficient income to start paying off their debt.
Rather than using a credit card, higher education can be funded through low-interest student loans, scholarships, grants, and part-time jobs. And if these sources are inadequate, students can consider a less expensive school or delay enrollment until they have more savings.
When taxpayers find themselves with an unexpectedly large liability, it can be tempting to just charge it. And conveniently, the IRS makes it easy to use a credit card to make payments through one of several companies that they authorize to accept money on their behalf.
However, there are several reasons why you shouldn’t. First, the payment processors will collect a fee of 1.88 percent to 2.35 percent. Also, the IRS will allow you to set up a payment plan with a more competitive interest rate. IRS underpayment interest rates change each quarter, but are currently at 3 percent, far better than any credit card’s standard interest rate. And finally, taxpayers should seek to have their withholding adjusted to ensure that they are not underpaying taxes in the future.
A Big Wedding
Planning a wedding is not easy, but couples need to live within their means and avoid financing the occasion with their credit cards. It is a special day for newlyweds, but it is not worth it when they are forced to begin their lives together underneath a mountain of debt.
People take vacations to take breaks from their everyday lives and to reduce stress. But when travelers finance their trips with their credit cards, they will only be returning to the difficulties caused by their debt. Going camping, staying at hostels, and visiting family and friends are just a few of the ways that people can have a getaway that fits within their means. And if that is not your idea of a dream trip, contribute to a vacation fund each month until you reach your goal, and use your savings to finance a vacation.
A Medical Bill
Treatment costs for the uninsured can be staggering, but that is no reason to turn to credit cards as a means of finance. Ideally, the uninsured should shop around before seeking treatment, but that is not always possible. But even after receiving the bill, most providers will be able to adjust their rates and offer payment plans with little or no interest.
It is one thing to earn rewards by making a charge to a credit card that can be immediately paid off, but it is another matter to use credit cards as a means of finance. By understanding why it almost never makes sense to finance some charges with a credit card, you can make the best decisions when presented with a major expense.