Dear Young People:
Paying for your groceries with your credit card is a good idea, but paying for your wedding with it is not. Your card issuer might lead you to believe that your card should be used for anything you want or need, but there are a few things in this world that just shouldnt be charged to plastic. Not only can these foolhardy transactions destroy your credit rating, but they can create an accelerating snowball of debt that can take years to escape. Here are 4 things that will absolutely come back to haunt anyone who buys them with plastic.
1) Your Wedding. Its wedding season again, which means that soon, young couples everywhere will spend way too much money on lavish ceremonies they cant really afford. On average, American couples spend between $19,000 and $30,000 on their weddings. If youve been good about saving and you have most of that money set aside, that can be a manageable expense, but when you max out your credit card to pay the caterers and the DJ, youre going to be in trouble.
For some reason, couples do it anyway. In addition to rendering your card useless, your wedding expenses will accrue a lot of interest if you dont pay them all off in full by the end of your billing cycle. As a result, your debt will become harder and harder to get rid of as the months pass. If you need to have a rock -star wedding, save yourself the stress and pay for it another way.
2) Cash Advances. When does an ATM withdrawal count as a purchase? When you make it with your credit card, of course. While credit card and debit cards make look strikingly similar, they function in very different ways. When you insert your debit card into an ATM, it pulls money out of your checking account. When you feed that ATM your credit card, however, it will issue you a very high-interest short-term loan.
Many credit cards charge special fees for cash advances. Youll have to pay fees to both the ATMs operating bank and to the card company, and the advance will carry an interest rate of about 20%. And you know that grace period for repayment that consumers are entitled to under the CARD Act? It doesnt apply to cash advances, so youll be slammed with late fees if you miss a single payment.
3) Traffic Tickets. Every purchase you make with your credit card is recorded on your credit report. When you apply for a new card or a loan like a mortgage, your lender has full access to this report. This means that they can see every purchase youve ever made, and the one thing you dont want them to see is a lot of traffic tickets.
Typically, card issuers dont care what you purchase with their products. If youre a 40-year-old single man and you want to charge a jumbo pack of thongs to the card, thats fine by them as long as you pay the bill on time. But a bunch of traffic tickets on your credit report, some experts believe, can indicate that youre more likely to default on your balance. That can be a turn off for some lenders.
4) Coffee, bottled water and other small daily purchases. Before you condemn us for taking away your morning dose of Starbucks, let us explain. Many Americans spend as much as $3,000 a year on coffee and other trivial items. It’s so easy for little charges to accumulate when you don’t have to think about how these purchases impact your finances.
Here’s a tip: for one week, make your daily purchases with cash. Since cash is tangible, youll be forced to acknowledge the impact that these $7 purchases have on your wallet. You’ll see your cash supply drain with every latte, and that should motivate you to cut back and spend less over the course of the week.
You dont need to be a genius to use a credit card wisely. Its easy to build a good credit rating while youre young as long as you use a little foresight before making a purchase. Before swiping that plastic, make sure that you can afford to pay off your charge by the end of the billing cycle, that you dont mind it showing up on your credit report and that you actually want what youre paying for. If you follow these tips, youll be on your way to that 800 FICO score in no time.