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When you've got instant access to a credit line, the adage "just because you can doesn't mean you should" is wise to keep in mind.
Credit cards are useful because they allow you to make purchases almost anywhere, for nearly anything, and at any time. However, such accessibility can also lead to major trouble. If you're not careful, overwhelming debt and credit damage can result. To avoid these problems, know which purchases you should never make with a credit card—even when you can.
When you see something compelling that's outside your normal budget, you may automatically reach for your credit card. But before you do, ask yourself these questions: Is it necessary? Do I need it now? Can I afford to pay the bill in full when it's due? If any of your answers are "no," slide the card back in your wallet. Odds are the item will still be ready for purchase at a later date, so if you truly want it, find a way to make it happen that doesn't involve you getting into debt.
Another Credit Card's Payment
If you're unable to send the minimum payment on one credit card but have an available credit line on another card, you may be tempted to tap into those funds. It's called "robbing Peter to pay Paul." The relief you'll feel will be short-lived, though, as the same request for payment will come up again next month, but your balance will have grown. If you can't identify another way to satisfy the payment, contact the credit card issuer immediately and ask for assistance.
A Pal's Purchases
Your credit card's line of credit is for you. If you help a friend or family member pay for something they can't afford with your card, you're putting your own finances and credit history at risk. If that person doesn't repay you as agreed, you will be responsible for the payment. In the event you can't meet it, debt will escalate, late payments will be noted on your credit report, and your credit rating will sink.
A Large Group Bill
It can be a smart strategy to charge a bunch of meals or tickets to your rewards card. You'll get all the points, miles or cash back, and when your friends give you their portion of the purchase, you'll stay in the black and make a profit (in rewards). Unfortunately, it can be easy to spend what the others give you instead of sending it to your credit card account. When that happens, you'll be stuck with the massive bill. Unless you're certain that you will apply every dollar each member of the group gives you to your bill, charge your part only.
While you can't pay your income tax bill directly to the IRS with a credit card, you can use a third-party payment service—for a price. The convenience fees these companies charge are nearly 2% of the amount you pay, and can be even higher if you use a tax preparation software's system. These fees will not just increase your liability, but if you spread the debt out over many months, the accumulated interest will be expensive. For example, the fee for an $8,000 bill might be $160. And if your credit card has an 18% APR and it takes you a year to repay, you'll pay nearly $800 in interest. It's best to find other ways to pay your debt, such as using savings or contacting the IRS to work out a solution.
There aren't enough presents under the tree, you missed too many of your child's soccer games, or you haven't picked up the tab for a generous friend in ages. These are common circumstances where pulling out your credit card can feel like it's the right thing to do when it isn't. Feeling guilty is not a good reason to get yourself into credit card debt. Think of another way to express your love.
Many lawyers accept payments by credit card, but exercise extreme caution when doing so. Their hourly rates are often in the hundreds of dollars, so you could hit your credit limit within a short period of time. If you must get legal representation but money is tight, you're better off with a low rate personal loan that comes with fixed and affordable payments. As long as you send the payments on time, you will protect your credit history and scores.
Never gamble with a cash advance from a credit card. Not only will the interest start to build right away (and typically at a higher rate than you pay on purchases), but you might return to the ATM to extract—and possibly lose—even more money. Stay far away from Las Vegas or any other gambling center if this scenario is even a remote possibility. And in general, avoid cash advances if at all possible so you won't be stuck with extra fees, higher interest and potentially growing debt that come with them.
A Round of Drinks for All Your "Friends"
Every transaction you make with your credit card should be done when your cognitive skills are sharp. When they are, you can weigh whether or not what you charge is needed and within your means. But when you're a few drinks in, rational thought can drop precipitously. Suddenly you're instructing the bartender to add 20 shots of tequila to your card. You'll be everyone's best friend that night, but the next morning you'll wake up to an agonizing balance that can rival your hangover. Who were those people again?
Remember, credit cards aren't toys; they're serious financial tools. Use them to your advantage by only charging when you're sure the purchases are a good idea, and when there will be enough cash in your checking account to cover the balance due.