There are many benefits to using a credit card to make purchases. Used properly, they can build your credit score (which helps you with getting loans and better interest rates on loans, among other things), allow you to make purchases you couldn’t otherwise afford at the moment and can give you money back or other beneficial awards simply by using them.
On the other hand, credit cards can be dangerous to the unwary or undisciplined. It is easy to pile up debt or end up in situations compounded by high interest where a hapless user can find themselves in a hole of debt, unable to climb out.
Here is some advice to help you decide whether you should use a credit card to make purchases within certain categories or give it a miss.
Honestly, the best way to purchase a new house is the old-fashioned way – a traditional fixed-interest mortgage, preferably with a 20% downpayment to avoid needing mortgage insurance. This way, you know what your payments will be every month, and if you manage to acquire extra money, you can make extra payments to save on interest fees in the long run.
While it is technically possible that you could buy a house with a credit card or use a credit card for house downpayment, you’d have to have extremely good credit and a very high limit; furthermore, you’d have to have a high cash-advance limit, because you can’t just walk up to a realtor and expect to pay with a card. There are ownership rights and paperwork to do, for one thing.
Also, they are going to want verification of the money up-front, which means a cash advance, and those daily interest rates, not to mention the high interest rates of credit cards in general prevent it from being a viable option.
For the same reason, it’s not a reasonable choice for paying your mortgage. It might help you if you fall behind on a bill, but if you can’t manage that bill, how are you going to manage the credit card debt, plus interest?
However, paying for your rent with a credit card may be a valid option, as long as you can pay it back before the interest kicks in. That can allow you to get the benefits from some rewards cards or make a payment that’s due just before payday.
Buying a car with a credit card is a bad idea for the same reason as buying a house — extra costs associated with the process make what seems like it could be a potentially good idea (especially if you *have* the money to purchase the vehicle outright) end up breaking even or even costing you more in the long run.
Fees associated with credit card purchases such as convenience fees and extra fees that you would have to pay to compensate a dealer for the 1-3% interest on such a large transaction would eat up any gain you’d make on rewards using the card.
You could potentially pay off your car loan with it and gain a benefit, as long as you can pay the entire thing back before the 0% APR grace period wears off, but there are transfer fees associated with a debt-to-debt transfer that could also make that unprofitable.
Using it for rideshare and other transportation is a win, though, as long as you can pay for it before interest kicks in.
A medical credit card can save you in the event that you can’t afford a medical procedure upfront. It can get you started immediately and allow you to pay monthly with a no-interest plan.
However, the problem with a lot of medical cards is that there’s a promotional grace period, much like regular credit cards, but worse — they accrue interest immediately for the entire cost of the procedure. If you pay it off during the grace period, the interest is waived. If you don’t, you are suddenly hit with the entire cost of interest regardless of what you have paid.
Use with caution!
If you haven’t noticed the basic rule of thumb yet, here it is: If you can pay the cost off before the interest kicks in, it’s not a bad deal. If you can’t — avoid it.
Large educational purchases should not be made with a card for the same reasons as the above large purchases.
That being said, there is a special circumstance:
A 529 Plan is a state-sponsored way to save money for a beneficiary and withdraw money tax-free as long as it is used for educational purposes. It is a viable option for credit but may require you to supplement with other means.
Yes! As these are considered gifts made for the beneficiaries, they are secure.
There are many great opportunities to use a credit card for handling bills. You can use autopay for convenience or pay bills manually, but as long as you can immediately pay off the credit card bill, you have a chance to gain rewards, cashback, and build your credit on expenses you were going to pay anyway!
The only downside is if a card or an auto payment has a transaction fee that negates any rewards, so investigate this first.
Starting a business using a credit card seems like a bad idea, especially considering the philosophy for large expenditures. That being said, those who are cautious actually can pull this off and save money with cashback rewards, taking advantage of the zero-interest grace period to save costs.
Before attempting this, research it carefully to make sure you understand how to manage the process and how to meet payments without falling into the deadly interest brackets.