Maybe, like me, you’ve almost stopped using cash. After all, there are so many good reasons to use credit cards.
There are many other ways to save or even make money with your credit cards.
But it’s also easy to make mistakes with credit cards. There are times when you should pay cash, use a bank transfer, or even take out a loan instead. Then there are specific card features or “benefits” you should almost always avoid using.
Here’s a look at some of the ways not to use credit cards.
1. To Pay Your Utility Bills
You might be tempted to use your credit cards to pay your electric, water, or cable bills, just to get that cash back and other rewards the cards offer. But doing so might cost you more than what you earn in rewards.
That’s because most utility companies have “convenience fees” for payment using a credit card. The extra charge is almost always more than the value of any rewards you’ll get.
For example, if your gas company charges a $2.95 convenience fee on your $80 bill, and you get 1% cash back, you’ll still be $2.15 further behind ($2.95 minus the $0.80 reward).
There are exceptions to this rule. Not all utility companies charge the fee, and even when they do it’s usually a set amount, so you may come out ahead when you pay a large bill with a card that has valuable rewards.
Using that $2.95 fee as an example, if you have a $200 gas bill and use a 2% cash-back card to pay, you’ll be $1.05 further ahead ($4.00 reward minus the $2.95 fee).
But most of the time using a card for anything that involves a convenience fee is a mistake. Just set up an automatic bank draft. Now that’s real convenience.
2. To Avoid Paying Now
It’s tempting to buy things you can’t afford now just because you can pay later. But if “later” is further out than your next statement due date, you’re just using your credit cards to get into trouble.
One recent report says households with credit card debt in the U.S. owe an average of $16,425. At a typical interest rate of 18% a balance that size will cost $246 per month just in interest. That’s largely a result of the “buy now, pay later” philosophy.
By the way, with a 2.5% minimum payment and 18.76% interest, it takes over 30 years to pay off $16,425, according to a credit card payment calculator. The interest alone will total $26,505 in that time.
Even if you can afford the payments ($410.63 in the example given), it’s worth remembering that all of the money going to interest, if you didn’t owe it, could instead be used for any important goals you have.
Buy now pay later? A better plan is to pay now or buy later when you can afford it.
3. As a Status Symbol
Sometimes credit cards are used to show off, as a sort of status symbol. But that can be expensive.
For example, the cards profiled in an article on prestigious credit cards for millionaires include some with annual fees as high as $2,500. Yes, you get rewards with them, but if you qualify for one of these high-end cards, do you even need a free hotel room or help with a plane ticket?
So called ”premium cards” for the rest of us can still have annual fees as high as $450. Unless you’re sure you’ll get benefits that exceed the cost of the annual fee, pass on these.
If you need to look important, use a no-fee cash-back card to buy a nice shirt.
4. For Cash From an ATM
If your credit card is set up for ATM withdrawals you might be tempted to use this convenient feature. But you’re usually limited to $500 (sometimes only $300), and there is almost always a better (cheaper) way to raise that much cash.
A credit card ATM withdrawal is considered a cash-advance, meaning you pay interest on it from the day you get it. The average cash-advance interest rate is 24%, plus you’ll pay an ATM fee ($2 to $4), and the cash-advance fee (typically $10 or 5%, whichever is more).
So, for example, if you get $200 from an ATM, you might pay $14 in fees and, if you pay off the balance in a month, $4 in interest. That’s $18, which may not seem like much, but it works out to an interest rate of 108% annually. Ouch!
A better plan is to pay for what you need directly with the credit card, if possible. You’ll save the fees and interest and maybe even get cash back or other rewards.
5. For a Regular Cash Advance
A credit card cash-advance can be done at a bank, or you can request checks from your credit card issuer. Some will even deposit the money directly into your checking account, just for you convenience.
Of course it’s more for their convenience and their profit. Even though you save the ATM fee and avoid the $500 limit, getting your cash this way is still very expensive.
CreditCards.com documents at least one bank that charges a cash-advance interest rate of 36% annually, and says the average rate is close to 24% annually.
Of course, before you even start paying that ongoing interest you’ll have a cash-advance fee. That’s typically $10 or 5% of the amount borrowed, whichever is greater.
A better plan is to borrow from a family member, pay for things directly with your credit cards, or use one of the other five strategies outlined in our post on cash advance alternatives.
6. For a Cheap Loan Using Convenience Checks
The convenience checks you get in the mail from your credit card issuers are a better option than going to an ATM or getting a regular cash advance. They usually have lower fees and often a lower interest rate.
In fact, if you’re really good at crunching the numbers you can make some money using those checks for credit card arbitrage.
But if you’re just looking for a cheap loan to help you catch up, watch out. That low rate will end, usually within a year. Then you’ll be paying the cash-advance interest rate, which can easily be 24% annually or higher. That makes this a very dangerous way to borrow.
You can find better options in our post on the best and worst ways to borrow. Perhaps the safest way to go is to sell stuff you don’t need and avoid borrowing at all.
7. To Finance Large Purchases
Large purchases made with credit cards can really rack up the cash-back and other rewards. For example, when my wife and I recently bought a $10,000 used car, we used my Hyatt Credit Card.
That one purchase gave us enough points for two free nights at a category one Hyatt hotel.
Of course, I paid the balance in full when the statement came, so I paid no interest. In other words the card was a way to buy the car, but not to finance it. Using credit cards to finance large purchases almost never makes sense.
Consider the fact that auto loan rates are around 4% (or even less) at the moment. No credit card is going to match that rate. Credit cards are just a terrible way to finance anything.
For non-essential large purchases, like large-screen TVs and boats, why pay interest at all? Just wait and save instead of using your credit cards or any other financing. Remember, any interest that you don’t pay is money you get to spend for whatever is important to you.
8. For Purchases Where Cash Is a Better Option
Sometimes you just shouldn’t be using a credit card at all, because cash is a better way to go for either safety or savings.
For example, when you’re dealing with small vendors, like at flea markets or roadside stands, even though they may have a credit card app for their phone, you can almost always negotiate a better price if you’re paying cash.
Another time to avoid using credit cards is at a casino. Not only will you pay fees and interest to get cash out of the ATM, but you might also lose more if you make that cash so easily available.
It’s best to bring only the cash you’re willing to lose and leave the credit card at home, or at least in the hotel room or car.
The many other examples of when you should use cash include when you want privacy and when you don’t trust a place with your credit card information.
If you’ve made any of these credit card mistakes, tell us about them, and what you did to correct them… and keep on frugaling!