Credit cards can be a valuable tool for financing purchases, collecting rewards, and potentially receiving a welcome bonus.
However, credit cards aren’t suitable for every type of purchase. The fees and interest that come with some purchases can offset the benefits you would get with a card, so it’s important to understand how a purchase could affect your finances before you whip out the credit card.
Avoiding these credit card purchases can help you save money and avoid credit card debt.
Why you shouldn’t use a credit card for every purchase
Credit cards offer the advantage of being a quick and easy way to pay, but there may be costs associated with making a purchase – usually fees and interest.
Credit card fees
Every time you swipe your card, a handful of fees are charged behind the scenes.
Banks and card issuers charge merchants “swipe fees” or interchange fees for processing transactions. Fees can range from 1.0% to 3.0% or more – or they can be charged as a flat fee.
If you make a purchase at a large store or from an online retailer that processes a lot of credit card transactions, the retailer may cover the swipe fees as a cost of doing business.
However, the merchant may pass the swipe fees on to the customer, often referring to them as a “processing fee.” While it may be a small portion of your purchase, the fees can add up and erase the value you get from using the credit card to earn rewards.
These fees are not always obvious. In most cases, you will need to read the fine print before completing your transaction.
Some credit cards also charge foreign transaction fees – typically 2% to 5% of the purchase amount – when you make a purchase in a foreign currency. You can find out if a card charges foreign transaction fees by checking the card’s terms and conditions page.
Credit card interest
If you don’t pay your balance in full by the bill due date, you’ll likely be charged interest. Typically, you’ll have what’s called a grace period after your bill due date, during which you can pay your new charges interest-free. However, if you roll over a credit card balance from one month to the next, your balance will accrue interest daily until it’s paid off.
If you pay off your balance each month, interest shouldn’t be a factor in your decision about whether to use your credit card for purchases. However, if you have a large expense that you know you can’t pay right away, it can be tempting to pay it off on your credit card.
But an expensive payment can turn into an astronomical expense as compound interest is added to the balance each month. Remember that interest may be charged on the purchase amount and any processing fees you were charged for using the credit card.
4 things you shouldn’t pay for with your credit card
Because of processing fees and credit card interest, there are certain bills you shouldn’t normally pay with a credit card. Some of these bills are better left with the original creditor because of the protection you get, which we’ll explain in more detail below.
Medical bills
You should avoid using a credit card to pay medical bills that you can’t afford right away. First, the hospital or doctor you owe is likely to allow you to pay off your debt directly, possibly without interest. Even if the doctor doesn’t offer a payment plan, you’re probably better off asking them to send you the bill.
You may be able to negotiate a lower bill if you can pay it in full. And in the worst-case scenario, government agencies are increasingly demanding that medical bills be removed from consumers’ credit reports. For example, a newly proposed rule by the Consumer Financial Protection Bureau would remove $49 billion in medical bills from the credit reports of more than 15 million Americans.
This means that medical bills you can’t afford in the future may never affect your credit score. However, if you pay your medical bills through a credit card, you’ll likely lose that protection. In addition, a high outstanding balance on your credit card can increase your credit utilization, which can worsen your credit score.
Tuition fees
If you’re considering using a credit card to pay for your college tuition that you can’t pay back in full, consider student loans first. Government student loans in particular have low, fixed interest rates that make college more affordable, and most types of government student loans don’t even require a credit check. But private student loans can also offer much better interest rates than most credit cards.
Federal student loans also come with protections like deferment and payment forbearance, as well as the ability to qualify for federal income-driven repayment plans. If you pay your tuition with a credit card, you’ll miss out on all of these benefits.
The Biden administration, for example, continues to try to reduce the burden of student loan debt – but is encountering some obstacles.
Rent or mortgage payment
There are platforms that allow you to pay your rent or mortgage with a credit card, but they usually charge high fees. For example, a platform called PlacePay (formerly RentShare) allows individuals to pay their rent with a credit card for a 2.99% fee. Another platform called Plastiq allows individuals to pay their rent and many other bills for a 2.9% fee.
This means if your rent is $2,000 per month, you will pay an additional $58 per month to use a credit card.
Considering that the best credit cards will give you up to 2% cash back at best if you paid your mortgage or rent with a credit card, you probably won’t earn enough rewards to offset the fees. If you end up with a balance and have to pay credit card interest on top of that, the financial consequences of this move could be even worse.
There is one exception, however. With the Bilt Mastercard®, you’ll earn 1x points per dollar of your rental (up to 100,000 points per calendar year) with no transaction fee. If you use the card 5 times per billing cycle, you’ll earn points on rental and qualifying net purchases.
Steer
Typically, you can put state tax payments on a credit card, but the fees make this prohibitive for most people. For example, federal tax payments to the IRS can be made through several platforms using credit cards, with fees ranging from 1.82% to 1.98%.
There are credit cards that offer 2% cash back, which is essentially enough to cover this fee. However, you must be able to pay off your card in full if it doesn’t have an introductory APR on purchases. Otherwise, the amount you put on the card will accrue interest, and you’ll likely pay more than if you had used another payment method. The minimal rewards you earned from using the card would also quickly disappear.
The exception: credit cards with introductory APR
While you generally shouldn’t pay the bills listed above with a credit card, there is one exception: cards that offer an introductory 0% interest on purchases for a limited time, as well as rewards that can help offset the fees.
Just consider the Wells Fargo Active Cash® Card as an example. This card gives new members a $200 cash rewards bonus when they spend $500 on new purchases within three months of account opening. Cardholders also earn a flat 2% cash rewards rate on their purchases and are eligible for a 0% introductory interest rate on purchases and qualified balance transfers for 12 months (20.24%, 25.24% or 29.99% variable thereafter).
Depending on the amount of the fee, you can use this card to pay a bill on the card and still stay in the black thanks to the rewards you receive. You would then have more than a year to pay off the amount you owe without accruing interest.
Remember that if you can’t pay off your debt within the 0% APR introductory period, interest will start accruing again, so don’t make payments on a credit card that you can’t pay off before the introductory period ends.
To figure out how much you need to spend each month on the balance to pay it off on time, divide the balance by the number of months in the promotional period.
For example, if you put a $5,000 tax bill on your card, which has an introductory 0% interest rate for 18 months, you would have to pay at least $278 per month to pay the bill on time. And don’t forget to factor in the transaction fee for paying your taxes with a credit card, which will likely add another $100 to your balance.
Things you can charge to your card
While some expenses shouldn’t be paid for with a credit card unless absolutely necessary, you can earn rewards on some purchases with the card that can help you save on purchases. Choose the best credit cards for rewards to maximize your earnings.
- Daily expenses: When you pay for everyday expenses like gas and groceries with a credit card, you can earn valuable rewards.
- Subscriptions: Paying for your regular subscriptions and streaming services with a credit card is convenient, and many cards let you earn bonus rewards on your subscriptions to TV, music, food delivery, and more.
- Travel: When you pay for your travels with a credit card, you can earn valuable travel rewards points for every dollar you spend and may even be eligible for travel insurance benefits if your card offers it.
Remember that you will still have to pay interest on these purchases even if you have a monthly balance.
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