Whilst credit cards offer many benefits to the user, they also provide the situation where the user falls into a cycle of never ending debt that can last for as much as a lifetime. Regardless of how you may feel about credit cards they are a way of life for many and therefore it is important to know when it is best to use a credit card or cash.
When Not To Use a Credit Card
1. When the Fee Offered Is Not the Best Deal
If you have ever been tempted to use your credit card to pay your mortgage, health insurance or other recurring expenses to gain the reward points, don’t! Even if the service provider takes payment by credit card, as they will charge a fee that outweighs any reward value. It is true that you can make tax payments to the IRS by credit card but this is along with a processing fee of up to 2.35% and don’t forget this is without the interest rate on the credit card, alternatively the IRS offers time limited payment extensions with no additional fees or instalment plans starting at just $43. Payments that are late are subject to a penalty of 0.5% per month plus interest charged at 3% however the total is probably still going to be lower than the cost of using a credit card.
2. When You Have Not Negotiated With the Creditor
Whatever the expense, medical bills or something that has got out of control before you pay with a credit card, look at the options of credit card or cash. Using your credit card is trading one financial problem for another. Contact the companies are billing department and they may reduce the balance paid or offer a payment plan with more favourable terms than your credit card.
3. Obtaining a Mortgage
Underwriters of mortgages do not like to see any changes in your credit status between the time you apply for a loan and when it comes to an end. If you suddenly start using your credit card, your credit rating could take a hit and leave you are unable to qualify for the loan required. When you are in the process of your mortgage application only use your credit card in an emergency, this is a situation that if it comes to credit card or cash, you should go for the cash option.
4. Don’t Buy It If You Can’t Afford It
Whether it’s a meal in a restaurant, a new outfit or for the wedding that you have always dreamed of, there is one rule to apply, if you cannot afford it, don’t buy it. It is easy to fall into a credit card trick of thinking you should have something, when in reality it is not in within your budget. This is another situation where if you have to choose between credit card or cash, cash should win.
5. Credit Card Balance
If you already have credit card debt you cannot afford to use your card, instead you should budget to pay the balance before you add anything further and this will avoid the risk of getting stuck in a cycle of debt.
When a Credit Card Should Be Used
There are times when you are in the position of deciding between credit card or cash and using a credit card would be the more fortuitous.
6. Additional Warranty or Purchase Protection
Making a major purchase with a credit card can bring additional benefits. The majority of credit card companies offer purchase protection and extended warranty for purchases made on a card.
7. Fraud Liability Limits
Credit and debit cards both offer a limit to the cardholder liability when looking at fraud; the credit card protection is enhanced. The liability for fraudulent use on a credit card is normally limited to $50 whereas the liability on a debit card can be unlimited.
8. Advantage Advantages of Exclusive Cardholder Benefits
Co-branded credit cards normally offer some type of exclusive benefits that come when making a purchase on the card.
The majority of credit cards offer a rewards program, these programs are highly competitive. Some offer cash back on purchases while others’ offer points. Those individuals that qualify can save thousands of dollars back each year on everyday household spending.
10.Security While Travelling
Frequent travellers can be more vulnerable to fraud, lost or stolen cash is gone forever however credit cards can be cancelled and replaced in one phone call.
The best advice is to use a credit card wisely, as debt is costly. Do not fall into the temptation of spending beyond your means purely because your credit card has an available balance. Instead only use a credit card to get added value from your spending. If you do decide to use a credit card check the financial figures first and see what you benefit see what you stand to benefit from and whether it is worth the cost in fees and interest.