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If you can't pay a bill with cash, you may be inclined to pull out plastic—but there are some instances where that might not be a good idea. While a credit card can help you finance expenses, earn rewards and build credit, you should avoid using a credit card for these six charges.
1. Taxes
Paying Uncle Sam with a credit card has one major sticking point: the card transaction fee. Third-party IRS payment processors charge 1.87% to 1.98% to handle credit card tax payments, and that fee can outweigh any points, miles or cash back you might earn from the transaction.
On top of that fee, credit card interest on a high tax bill can be costly. If you make just the minimum payment each month, the tax debt could take years to pay off. Setting up a payment plan with the IRS or taking out a low-interest personal loan instead of using credit could be more affordable ways to pay off your tax bill over time.
2. Medical Bills
Like taxes, putting medical bills on your credit card and then maintaining a balance can lead to a debt trap that's hard to climb out of. Before relying on credit, take your time to read through your medical bills, review benefits, try to negotiate what you owe and request an installment plan with the provider.
If installment plans aren't available, reaching out to assistance groups, investigating charity care options or taking out a personal loan with a term of several months or years could help you pay for medical procedures. Besides potential cost savings, an advantage of personal loans is that you can't get stuck in a never-ending credit card debt cycle. That's because loans offer you one lump sum with installment payments designed to pay off your debt within a preset term as long as you make scheduled payments on time.
3. Rent or Mortgage Payments
Usually, rent and mortgage payments have to be paid with a check or bank transfer; however, some third-party companies may let you pay rent or your mortgage with a credit card. There is a catch, though: Usually, this type of service comes with a fee, and a typical fee is 2.5% or 2.99%. If your rent is $2,000, a 2.5% processing fee would set you back $50 each month.
If you're running short on cash, putting housing costs on your credit card month after month could put you in a worse financial situation. Instead, contact your landlord or lender to explain what's going on. In some cases, you may be able to negotiate a payment arrangement or loan forbearance that helps you avoid processing fees and gives you a payment break so you can get back on financial track.
4. Cryptocurrency
Some crypto platforms like eToro and Coinmama may let you buy cryptocurrency with a credit card; however, it's usually not a good idea. Investing in crypto with card funds is risky because the market is unpredictable, as evidenced by the recent crypto crash. If your investment loses value, you're still responsible for paying back what you owe plus interest, which could result in a net loss.
A better way to use a credit card to invest in crypto could be signing up for a credit card that offers crypto rewards. With these cards, purchases earn cash back that can be used to buy crypto to build your portfolio.
5. College Tuition
Unless you're charging tuition to your card and paying it off right away, it's almost always better to first consider other school funding options. Scholarships and grants are money awarded to students for school that usually doesn't have to be paid back. Student loans have to be repaid, but they're designed for college expenses and often come with borrower perks and lower interest rates than credit cards.
Both federal and private student loans may provide a grace period where you're not required to make payments while in school or for months after leaving. This could give you time to find a job before you have to start paying off student debt, a feature that doesn't exist with credit cards. Additionally, if you run into trouble paying for your federal student loans, programs such as deferment and forbearance can be used in the short term until you get back on your feet.
6. Money Orders, Wire Transfers, Casino Chips and Other "Cash-Like" Transactions
Lottery tickets, money orders, casino chips and use of third-party payment services may be considered "cash-like" transactions and treated as credit card cash advances by your card company. Cash advances are usually charged a higher interest rate and come with extra fees. For example, cash advance fees commonly range from 3% to 5%, with a minimum fee of $10.
When you need cash for, say, a security deposit or to pay a babysitter, drawing funds from your bank account is cheaper than drawing from your card. Even if you have spare cash to play the lotto or visit the casino, beware that doing so excessively could cause future financial troubles. If you or someone you know is having difficulty managing a gambling addiction, the National Council on Problem Gambling (NCPG) or Gamblers Anonymous may provide assistance and resources.
The Bottom Line
While credit cards are an easy and secure way to handle transactions, not all purchases are ideal for a credit card. Certain cash-like transactions trigger higher fees and higher interest rates. Plus, purchases that are going to take you several months or years to pay off could be better financed with a personal loan if it gives you a specific payoff window and a lower rate.
If you think you may need a personal loan to pay your taxes, medical bills or another large expense, shopping around is the best way to find the right loan for your needs. Experian's card comparison tool can help you get personalized offers from multiple lenders without impacting your credit.