5 things you shouldn't charge to your credit card

Credit cards offer many benefits, such as added protection with extended warrantees and reward points, plus they can be great for managing short-term cash flow. It's possible -- and often wise -- to put the majority of your purchases on credit. However, you should think twice about some purchases before you charge.

1. Impulse purchases
If you've ever gone to the supermarket for two things and come out with a shopping cart full of items, you've impulse shopped. Impulse purchases can end up costing you a bundle, especially if you haven't budgeted for them. A candy bar at the checkout might not make or break you, but if you decide on a spur-of-the-moment splurge in the electronics department, you could wind up with a credit card balance that's higher than you budgeted for.

You may think you have the money to pay it off right away, but unless you've run the numbers on paper, you don't know for sure, and you could end up paying more in interest than what the item originally cost, Seun Adeyemi, senior financial planner at financial planning firm SA Capital, said in an emailed response to questions.things-not-to-charge

To avoid impulse spending, make a list before you go to the grocery store. It's easy to rack up the bill on food if you're just tossing in items without direction. And if you over-buy perishable items, you could end up paying for something that will soon be in the trash. Also bypass some aisles to avoid purchasing items you want, but don't need.

If you're considering an expensive splurge, walk away and come back to it after you finish the rest of your shopping. Log into your bank account and look at your current card balance; with smartphones and mobile banking, you can do this right in the store. If you still really
want it, ask yourself how long it would take you to pay it off.

2. Purchases you can't afford to pay back right away
Unwise purchases aren't always the product of an impulse buy. Sometimes, you may consider your budget and current balance and know spending isn't a good idea, but do it anyway. Maybe you just can't bear to miss out on your friend's bachelor party or the annual family vacation. You reason that you'll just put it on credit and pay it off in a few months, but before you know it, it turns into a year or 18 months.

You're hardly alone if you don't pay off your credit card bill every month. BMO's 2015 Credit Card Report found that one in three Canadians continuously carry a balance on their credit cards. But carrying a balance always comes back to haunt you, said Adeyemi.

"The interest payments end up compounding and, furthermore, it can ruin your credit," he said. "Late payments show up on your credit report and that affects your ability to do other things in the future, such as get a job or buy a house."

The best way to avoid carrying a balance is to have a monthly budget and to track your spending. Treat your credit card as though the funds are coming directly from your checking account: would you have enough to cover your expenses? If the answer is no, think twice before making the purchase.

If it's necessary to put a large purchase on credit that you can't pay off in a single month, make a plan before you buy to pay it off, and be sure the payoff plan fits in with your budget and includes interest. If you make an unrealistic plan, you'll just end up frustrated and possibly in the red elsewhere because you're putting too much toward your inflated card bill. You can't always avoid emergency purchases, but you can be responsible about paying them off so you can avoid falling in too deep of a debt hole.

3. Large tax bills
If you owe taxes, you might think it's a good idea to use credit to pay the bill so you can at least get some cashback points out of the deal. Or, maybe you can't afford to pay the entire bill before the deadline, and you want to use your card to avoid the late payment penalty. The only way to do this is to use Plastiq, which lets you pay off your tax balance online via credit card.

You may earn your rewards, but there are a couple of drawbacks to paying your tax bill with your credit card. First, Plastiq charges a fee of 1.99 to 2.49 per cent per transaction, which can negate any points you may earn.

The other downside is the interest. You'll face a 5 per cent penalty for filing your taxes late, but unless you have a low- or no-interest card, you'll likely be looking at about 19 per cent interest with your credit card, making it more costly than the late penalty.

"This, I believe, is actually a no brainer," said Adeyemi. "I don't see why anyone would do it. The late payment the Canada Revenue Agency will charge you is much lower than the interest rate your credit card company will charge you. You are better off calling the CRA and making a payment arrangement so you can pay off a little at a time, either monthly or even quarterly."

4. The down payment for a property
When you're trying to scrap together the minimum down payment for a property, it can be tempting to use your credit card to take out a cash advance.

This isn't wise for several reasons. First, the interest rate for cash advances is usually higher than it is for purchases, not to mention interest is applied from the day you receive your funds, rather than at the end of the billing cycle. Secondly, doing so is likely to affect your credit score because your credit utilization will go up, which makes you a greater risk to lenders. You might end up paying a higher mortgage rate, or your mortgage application could be denied.

It's always best to save up for your down payment and be able to hand over the cash, or perhaps to get a gift from parents or other relatives.

5. Major purchases for someone else
It can be tempting to help someone you care about when they're in a bind. Perhaps you don't have the money to hand over, but you have a credit card with a high limit and you consider taking out a cash advance or simply using your card to make the purchase.

Family and friends usually have good intentions to pay you back, but the reality is, life happens. When they don't pay you back, not only are you saddled with the debt, you also have to pay accruing interest for as long as it takes to get it paid off. Even worse, it can put your relationship on the rocks. If you really want to help out, consider using a line of credit instead of your credit card, since it typically comes with a lower interest rate. As a rule of thumb, don't lend out more than you can afford to pay off yourself, or more than you're comfortable giving someone as a gift, because often, that's what it becomes.

See related: 5 ways to defuse shopping addiction triggers, The difference between good and bad debt, Getting help for your debt-accruing vices
Published June 17, 2016

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