Avoid the debt trap by staying disciplined when you swipe your card.
Your credit card can be a blessing or a curse. It can earn you rewards points so that you can get more value from paying with plastic. It can be your “get out of jail free” card in emergency situations. But if a credit card is carelessly used, it can also be your highway to insurmountable debt. Since this is something we all wish to avoid, here’s a list that will help you avoid falling into a credit card debt trap.
10 things not to charge to your credit card
1. ATM withdrawals and cashouts
Let’s start with an obvious example of what not to do with your credit card. Cash advances should be avoided at all costs. They are interest magnets. Cash advances typically come with a higher interest rate than purchases and a cash advance fee. They also have no interest-free days. This means if you use a credit card to withdraw money from an ATM, you’ll be charged interest from that day until you pay off your balance.
- Instead… Try a debit card, which lets you access your own cash interest-free. If you have a specific purchase you need to make, check if you can pay with credit instead of cash. Of course, if you actually need cash on credit, there may be no way around this except to borrow cash from your mates who may spare you the loan shark interest rates. Otherwise, be sure to pay off your full credit card balance ASAP.
2. Mortgage payments
Most credit cards will process mortgage payments as cash advances. This means if you decide to make a mortgage payment with your credit card, you will be charged an interest rate of around 19-22% (depending on your card’s cash advance interest rate). That's not going to look pretty later on if you can’t pay down your full account balance anytime soon.
- Instead… If it’s a rare event that you’re struggling to manage this month’s mortgage payment due to some unforeseen circumstances, try appealing to your mortgage lender for a grace period. They are usually sympathetic to temporary hardships and quite willing to renegotiate a more feasible repayment schedule for you. You could also seek out alternative loan options like personal loans, which come with considerably lower interest rates, or consider refinancing to help simplify and manage your loan repayments.
3. Gambling
If gambling on credit is not a good idea, gambling with your credit card is doubly unwise because gambling transactions are also considered to be cash advances. What could be worse than losing money at the tables? How about having to pay a fifth more in interest on all your losses? Talk about rubbing salt in the wound.
- Instead… A wise option would be to quit gambling altogether. But if you simply must, make a commitment to gamble only with money that you have. This way you only lose what is yours and can avoid falling into deep debt.
4. A night out at the casino
Even if you’re not gambling, having dinner and drinks at the casino can also be considered as a “gambling transaction” and, in turn, constitute a cash advance. Innocent as it may be, if you should mistakenly charge your casino refreshments to your credit card, this expense could attract interest charges at the cash advance interest rate until your card balance is clear.
- Instead… Be careful to pay for all your expenses at the casino with cash or a debit card. It’s better to be safe than pay interest. It also might help curb the temptation to overspend when you’re playing with your savings rather than a line of credit.
5. Medical bills
While your credit card may be a real saving grace in emergency medical situations, be careful how you deal with the matter afterwards. Submitting insurance claims is ideal, and could allow you to quickly pay off your credit crd balance. But in the event that you’re not covered, those hospital bills can become extremely expensive if left unchecked on your credit card. The last thing you want is mounting interest fees on top of your medical fees.
- Instead… Try negotiating a payment agreement or staggered payment plan with your medical provider if you have difficulty footing the full bill at once without swiping your credit card. Check what medical coverage you will get beforehand and be sure to scrutinise those bills to ensure you have been correctly and fairly billed.
6. Holidays
We all need that much-deserved break every so often, but putting your entire vacation on plastic is far from ideal. Unless you know you can afford to pay it all back before interest starts accruing, charging your whole vacation to your credit card could leave you with months or years worth of debt.
- Instead… Plan ahead. Work out a budget for your trip and start saving. If you do decide to use your credit card for a holiday, use it strategically. Use a card that offers complimentary credit card insurance when you pay for your pre-booked holiday costs such as flights and accommodation. Or you could use a card that comes with a frequent flyer rewards program and will reward you for your holiday spending. For more tips on planning your holiday spending on plastic, see how guide on how to use a credit card for your holiday.
Whatever you do, make sure you've devised a budgeting plan that will help you pay it all back to avoid post-holiday debt lag.
7. Government bills or fines
Some government charges and fines are processed as cash advances on credit cards. This can apply to other things like telco and utility bills as well. Note that some companies may also impose a 2-5% surcharge for paying your bill with a credit card. Some credit cards do allow you to earn rewards points on ATO payments, but these are becoming less common.
- Instead… Consider paying your bills by direct debit from your bank account. If you do charge them to your credit card, make sure that you are able to pay off that monthly balance without having to bear any accruing interest.
8. Travellers cheques or foreign currency
Again, these are cash equivalents and are considered cash advances. You will incur interest (and possibly a cash advance fee) from the time of purchase and you will carry the accruing interest for as long as you carry a balance on the account.
- Instead… Use cash or a debit card for foreign exchange transactions or purchasing travellers cheques. If you have no choice while you’re overseas, consider paying for purchases with your credit card instead of getting foreign cash out of the ATM. You should also factor in exchange rate fluctuations and foreign transaction fees when weighing up your options.
Learn more about cash advances
9. A new car
Charging your new car to your credit card is a risky move, since it would probably put you far closer to your credit limit than is comfortable. If you max out your card, this could result in penalty fees and a black mark on your credit report. Similarly, if you struggle to repay the monthly repayments on such a large purchase, you could end up with late payment notices or defaults that hurt your credit score. Your card issuer won’t be pleased with you either way. Plus, carrying such a high balance on your credit card elevates your credit utilisation ratio, which also hurts your credit score.
- Instead… Consider a car loan, which comes with a lower interest rate than your credit card. If you’re concerned about a bad credit score not qualifying you for a car loan, there are some bad credit car loan options out there too.
Credit ratings: What is “good credit” and “bad credit”?
10. Big ticket household items
Attempting to furnish your new home with your credit card is similar to buying a new car with it. The trouble with charging these big ticket items to credit is that you tend to spend more when you swipe. You’d think twice about paying $2,000 for that swanky new washing machine if you had to dish out your own cash for it.
Putting big ticket items on your credit card also increases your risks of maxing it out and hurting your credit score with missed payments – not to mention the cost of interest that could accrue over time. If you do decide to put big ticket items on your credit card, make sure you’ve made the calculations in advance so you know exactly how much you’ll have to pay each month to avoid unmanageable interest charges.
- Instead… Plan, budget and save for these things. Wait until you have the cash set aside before going nuts at the furniture or electronics store. Otherwise consider shops that offer flexible interest-free financing options.
Ultimately, the rule of thumb is not to get caught carrying a debt or interest charges that you can’t easily shake off. This doesn’t mean you should avoid using your credit card altogether. It just means that you should only use it when you’re able to repay your monthly balance, preferably in full.
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