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Americans carry an average credit card balance of $6,194, and with the coronavirus pandemic triggering financial unrest around the world, that average could very well go up in the next few months.
As you reevaluate your 2020 finances, however, it's good to make a plan for your credit card use so that you stay aware of what makes up the balance on your card.
While you may be relying on your credit card more than usual now to get through a pay cut or a job loss, you should always remind yourself of a few general guidelines of safe credit card use. That way, you keep long-term financial wellness in mind as you get through this difficult time.
"The general rule is: Don't use your credit card for anything that you can't pay for in full when the bill is due," Priya Malani, a founding partner of Stash Wealth, a millennial-focused financial-planning firm, tells Select. In times of crises, like this one, that differs person to person.
Below, we spoke to four personal finance experts about the five types of expenses they recommend never charging on a credit card. Under normal circumstances, these are the rules of thumb.
1. Your monthly rent or mortgage payment
You may have the option of charging your monthly rent or mortgage on a credit card, but pay close attention before doing so.
"While it may seem like a great deal and easy way to rack up extra rewards points, there's usually a 2% to 3% processing fee that negates all of the benefit, and then some," Malani says. "We catch this mistake a lot."
Make sure to know beforehand all the additional costs associated with charging this type of purchase on a credit card.
Erin Lowry, founder of Broke Millennial®, tells Select, "That processing fee could chip away at any value you believe you're getting in rewards."
And if you're a homeowner, this also means you shouldn't charge your property taxes on a credit card.
"This may signal that you've bought too much home and can't meet this obligation with the income you bring in," explains Kara Stevens, founder of The Frugal Feminista. Property tax, which you pay on top of your mortgage and interest, should always be factored into the cost of your home — and therefore into your budget.
Even though credit cards can offer convenience, there's really only one time you should use them for the purpose of charging your rent or mortgage, and that is if you want to meet a minimum spend on a new credit card in order to earn a welcome bonus. That is, of course, if the bonus is large enough to outweigh the cost of the processing fees, and you plan to completely pay off the balance before you're charged interest.
For example, new Chase Sapphire Preferred® Card cardmembers can earn 75,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's over $900 when you redeem through Chase Travel℠.
2. A large purchase that will wipe out available credit
It's tempting to charge large purchases with a credit card if you know they put you closer to earning a sign-up bonus. But experts recommend you only do this when you know you can afford to pay off the balance.
Why? When a large purchase sits unsettled on your credit report, you'll not only be hit with interest, but you'll also wipe out your available credit limit. Your credit utilization rate is a very important factor that's used when determining your credit score, and if one or more of your cards is maxed out, you'll see a negative dip on your report until those balances are free again.
3. Taxes
You can pay taxes with a credit card, but in most cases you probably shouldn't. Unlike using a bank account transfer, credit card payments aren't free. You'll wind up incurring a fee that's a percentage of your tax payment.
This fee will vary by the payment processor you choose, but they can range from 1.87% to 3.93%.
"If you owe the IRS money, you can work out a payment plan with them at a much lower interest rate than what your credit card will charge you," Malani says.
4. Medical bills
Charging your unexpected medical debt on a credit card may seem like a quick fix, but it can cost you more if you're unable to pay off the full amount right away. If you can't afford to, you're going to rack up interest while you try to pay off your credit card.
"Given the fact that life is known to throw us a curveball or two, make sure you set aside an emergency stash so you don't have to use your credit card to cover an unexpected medical bill or other unavoidable expenses," Malani says. "These charges don't belong on a credit card even if the doctor or hospital suggests you use one."
And if you're looking to lower the interest rate on medical debt you already have, consider a 0% balance transfer offer. The Chase Slate® Credit Card offers a low introductory balance transfer offer: $0 fee during the first 60 days of account opening and 0% intro APR for the first 15 months from account opening (then 14.99% to 23.74% variable APR). Keep in mind that qualifying for this card usually requires having a good credit score at minimum.
5. A series of small impulse splurges
It's not just the large purchases that can set you back, but the minor ones as well. If you're someone who likes to rack up points and rewards by charging entertainment, travel and dining costs onto your credit card, just make sure you have a plan to pay your balance off in full when the bill comes.
"For example, let's say you have a $1,400 balance from multiple dinners out and events with friends on a credit card with a 19.99% APR," Bola Sokunbi, a certified financial education instructor and author of "Clever Girl Finance," tells Select. "Well, if your minimum payment is $70 a month, it would take you 25 months to pay it off, paying over $300 in interest."
One reason that impulse purchases are so easy is because credit cards delay the pain of paying. When you don't see the money come out of your checking account right away, it's almost like these purchases don't exist. Or at the very least, they're easier to rationalize — but they can add up quickly.
"Too many of these purchases with this mentality creates the 'credit creep' where your balance goes up little by little until you're overwhelmed by the debt and the accompanying interest," Stevens says.
The strategy she recommends? "Pay for indulgences with the money you've set aside specifically for fun."
Bottom line
When deciding what you should and shouldn't charge onto your credit card, it's helpful to consider treating your credit card like you would cash. Make it a habit to check your balance daily to see how much you're spending, just as you would have if you handed over physical cash for your transactions.
Using a credit card can make expenses feel out-of-sight and out-of-mind, so get a receipt with your everyday purchases to help them feel more real, especially in a time when you may be charging a lot more than you normally do.
And remember, the ideal consensus is: "Never charge without having a plan to pay off in the short term," Sokunbi says. "It's all about responsible use of credit."
Information about the Chase Slate® Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.
