10 Things You Should Never Pay For with Your Credit Card
We’re often advised to use our credit cards when paying to enjoy things like cash back, purchase protections and the like.
But are there times when we should hold off swiping? There certainly are! Here are the instances when you (probably) should NOT use your credit card:
1. Car loan payments
If you are struggling to make your car instalment payments at the end of each month, it’s not a good idea to resort to your credit card to cover the payment.
By doing this you are likely just stacking debt.
Now if you don’t pay your credit card bills within the grace period, you will be paying interests on both your car loan and credit card.
But that’s not all, if you continue to use your credit cards to pay for car instalments without promptly paying it off, you could eventually rack up unmanageable debt with car loan defaults and credit card dues.
2. Home loan payments
By now, you should be seeing a pattern. It’s not a good idea to pay for any loan with a credit card.
But home loans may be a tad worse than cars, since it is likely to be a larger figure than your car payments.
If you are having a tough time with home loan repayments, the best option would be to call your bank and negotiate instalments.
By restructuring the loan to extend your repayment period, you can improve the affordability of monthly payments.
Although overall interest costs would increase, it is preferable (and likely cheaper) than paying with a credit card.
3. Money transfers
If you need to send money to relatives or friends overseas via systems like Western Union, be careful not to use your credit card to do so.
When you use your credit card, the swipe is often treated as a cash advance from the card’s account and will incur heavy fees.
Depending on the bank, the fee can range from RM10 to RM50 or 5% the withdrawal amount, whichever is higher.
You will also typically incur a finance charge of 15% to 18% per annum (depending on the provider), calculated on a daily rest, until the amount is settled in full.
These are pretty heavy costs, which if avoidable, should be avoided.
Know that cash advances are best used for emergencies only and could be unnecessary if you have a debit card or bank account with sufficient funds.
4. Expensive art and collectible cars
If you have a large enough credit limit, you might just be able to use your credit card to pay for a second-hand collectible car or other luxe purchases like exclusive art and the like.
But should you? Well, if you don’t have the cash to buy it, then it’s best if you hold off putting these things on credit. You don’t want to end up in debt, especially over frivolous purchases.
In line with these items, you should think long and hard when making any other large, unaffordable purchase with your credit card.
Paying for designer wedding dresses, luxury holidays packages and expensive jewellery with a credit card is not the wisest choice.
Moreover, some of these items are not typically covered by credit card insurance, so do take note.
Now if you have cash in hand but are using your credit card for mere convenience, then it shouldn’t be an issue. Just remember to pay your credit card bill within the grace period.
5. Home renovations
Whether it’s an emergency renovation or one to improve the aesthetics or utility of the home, you shouldn’t be too quick to swipe your credit card to pay for it.
Renovating your home is expensive business and a credit card isn’t often the right type of payment method for such an outlay.
Home refinancing rates average 3.5% to 4.5% per annum which is much cheaper than a credit card’s 15% to 18% per annum.
Even a personal loan which is much more hassle-free than a home refinancing loan would be a better option when compared to credit cards.
6. OPE – Other People’s Expenses
You may be a humanitarian at heart but with your credit card, it’s quite alright to be a little selfish.
Your friends and relatives may ask for your help to put stuff on your credit card with the promise to pay you back in cash.
It could be a harmless request from trustworthy kin but if you can’t afford to cover the cost of the purchase before the due date, think carefully before agreeing.
You could unnecessarily incur interest costs or lose your interest-free grace period, if your friends flake and you can’t pay the credit card bill in full when due.
7. Medical bills
This one is not a ‘never’ –but more a ‘probably shouldn’t’. If you don’t have insurance to cover your medical bills, think twice or three times before putting it on your credit card.
The danger with paying for healthcare with a credit card is that hospital bills can be exorbitant.
It can use up your credit limit in one fell swoop, which will bring up more causes for concern.
For one, your credit utilisation ratio (the amount of credit you have used vs how much is available to you) will be higher and this could lead to a poorer credit rating.
If your credit score is bad, your chances for loan approvals and new credit cards go down. Also, if you do manage to secure a loan, you might be stuck with higher interest rates.
Of course, this is the worst case scenario and banks will look at more than just your credit utilisation ratio when deciding on your loan applications.
But nevertheless, it is certainly a step in the wrong direction for your finances. Have you considered a medical card for you and your family?
8. Education and tuition fees
Desperate times call for desperate measures and when you are a working student juggling a career, coursework and money woes - things can seem rather desperate.
But do resist using your credit card to cover your college fees for as long as is possible. These payments can quickly pile on and credit card interest rates do not come cheap.
If you were unable to obtain a scholarship or student financing, you might want to consider a personal loan instead.
Personal loans disburse the approved loan amount in full and not in instalments, so you can pay your fees and not worry about the next payment.
You may even use it to your advantage to pay up your tuition in cash and ask for an upfront discount (if you don’t plan to change courses and institutions).
Moreover, the interest rates for a personal loan are much lower than that of a credit card, which averages 18% per annum while personal loans skirt the 8% range.
Moreover, during promo periods, personal loan rates can dip rather attractively. Alliance Bank CashVantage Personal Financing-i is offering a 3.99% p.a. flat rate if you borrow up for one year or 5.99% p.a. if you borrow for two to three years.
9. Downpayment for a house
They say the best time to buy property was yesterday! Property prices in Malaysia have (historically) never gone down and so, most consider it to be a sound investment.
However, what eludes young buyers is the affordability to make the purchase – a house is one of the most expensive things you’ll ever buy.
Did you know that loan instalments are not the only expense to consider? There are property taxes (assessment and quit rent), legal fees, management charges as well as maintenance.
But what most of the younger generation struggle with is the down payment. In fact, without it, the home-buying process goes no further.
While zero-down loans exist, they are incredibly difficult to obtain for most young buyers with smaller incomes.
Thus, putting a down payment on a credit card or several cards may seem like a good idea. But in truth, you could be setting yourself up for major debt down the road.
Credit card interest rates just do not justify such a large charge. You will be paying for interests on a home loan but also on your down payment. Instead, it’s smarter to wait it out, save up and buy when you are truly ready.
This way you’ll be in a better financial position to deal with ALL costs that come with owning a property. The only right time to buy is when you can afford it.
10. Large business expenses
If you’ve a business to run and can’t afford your stock and other heavy expenses, a credit card shouldn’t be the solution.
In this case a business loan or even personal loan would make more sense with lower rates and flexible repayments.
However, you should consider a business credit card for small expenses. Things like petrol for the company car, travel expenses and payments for online services make perfect sense to charge to a credit card.
You’ll be able to keep track of spending, make convenient, secure payments and enjoy the credit card protections that come with.
Stay on top of your finances always - it's a lifelong lesson that will pay off many times over!