Credit cards are great for earning rewards, protecting your purchases and building your credit. That said, you may want to opt for debit or cash if using credit will cost you in interest or fees. Here are three times you shouldn’t use a credit card.
1. A purchase will max out the card
Maxing out your credit card, or charging all the way up to your limit, can damage your credit score while also potentially costing you in interest and fees. If a purchase will cause you to reach or exceed your card’s limit, don’t swipe.
Here’s why: One of the most important factors in your credit score is credit utilization, or the amount of debt you have in relation to your credit limit. Ideally, this number should never exceed 30%. Maxing out your card means a 100% utilization rate, which will likely mean a significant hit to your credit.
On top of that, going over your limit will probably trigger an over-the-limit fee. And if you don’t pay off the balance by the due date, you’ll also incur interest on your average daily balance. This all adds up to a big hit to your finances — both in monetary losses and damaged credit.
2. There’s a fee for paying with credit
Using your credit card for certain transactions — like qualifying education or government payments — often results in a convenience fee. Convenience fees tend to range from 2% to 4%; they cover the interchange fees that merchants usually have to pay to process credit card transactions.
You may also incur surcharges on certain purchases if you choose to pay with plastic. For instance, a convenience store may charge you a small fee for using credit if you don’t spend a certain minimum amount. This is a surcharge, and it’s legal in most states, provided that it’s properly disclosed.
3. You don’t have the money to pay it off by the due date
If you use your credit card responsibly, you can get a free short-term loan while also potentially earning rewards. However, if you carry a balance from one month to the next, the interest will exceed the rewards you’ll earn.
Let’s do the math: Interest accrues on your average daily credit card balance. If your average balance is $2,000 and your APR is 20%, you’ll owe $33 in monthly interest, or around $400 a year.
To avoid interest, only charge what you can pay in full each month. And for those months where everything goes wrong — your income drops, your dog has an unscheduled vet visit and your car starts smoking — have an emergency fund you can draw from to avoid going into debt.
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