When You Should and Shouldn’t Use a Credit Card

According to recent TransUnion data, the average credit card balance in the U.S. was $5,474 in the third quarter of 2022, up from $4,857 in the third quarter of 2021. Credit cards are a convenient alternative to cash, but they can complicate your situation if you don’t repay your balance in full each month. 

Most credit card companies compound interest daily, so interest charges on unpaid balances can rack up, making it more challenging to repay debts. 

Whether you’re carrying a credit card balance, the general rule is not to charge anything you can’t pay off at the end of the month. Here’s our advice on managing credit card spending—when you might avoid spending on your card and scenarios where it could make sense. 

In this guide:

• When to use a credit card
• When not to use a credit card
• Risks of credit card misuse
• Be responsible with credit card spending regardless of the use

When to use a credit card

Depending on your situation, using your credit card in the following instances may result in certain benefits. Many credit cards allow you to earn rewards from your regular purchases, which you can use to offset the cost of travel, your monthly credit card bills, and other expenses.  

Keep reading to find out why the following purchases could make sense if you have sufficient funds to repay your entire credit card bill at the end of the month: 

• Everyday expenses
• Vacation
• Large, necessary purchase for home
• Pay off another debt
• Insurance

1. Everyday expenses

Using your credit card for daily expenses such as groceries, gas, and the occasional meal out could make sense. Many rewards credit cards offer tiered rewards programs, and you may be able to earn a high rewards rate in common spending categories.  

2. Vacation

If you have a travel card and pay your balance in full each month, putting vacation expenses such as hotels, plane tickets, and rental cars on your credit card could make sense. Some travel rewards cards offer special protections for cardholders, including trip cancellation and interruption insurance, rental car insurance, and lost baggage insurance. 

Read the fine print before you put your vacation on your card, and remember, it only makes sense if you can pay it off in full. 

3. Large, necessary purchase for home

If your furnace breaks in the middle of winter, a replacement often means spending thousands of dollars you weren’t planning to spend. 

Many service companies, such as plumbers and HVAC businesses, offer credit cards with deferred interest periods. This allows you to repay over time without incurring interest charges. Just be sure to set up automatic payments or a reminder to pay a portion of your monthly balance and repay it in full by the end of the deferred interest period. 

4. Pay off another debt

In certain instances, it can make sense to pay off another debt with a credit card. For instance, this strategy can be smart if you have high-interest debt on another card and transfer it to a new card with a 0% introductory APR for 12 or 18 months. 

It will provide a break from interest charges and give you time to repay your balance. But you must commit to paying it off before your new card’s regular APR kicks in, and interest charges accumulate. 

5. Insurance

Putting your insurance payments on your credit card may be wise. Insurance companies often offer policyholders a discount for paying annual insurance premiums upfront. You may be able to pay using your debit card, bank account, or credit card. 

If you’re trying to earn a welcome bonus by meeting a minimum spend on a new credit card, prepaying your insurance with your card can make sense if you can pay off your total balance.  

When not to use a credit card

A credit card can be a helpful tool for certain expenses. However, it can be wise to avoid using your card if your issuer will charge processing fees or you can’t afford to pay your balance in full. Below are certain instances where using a credit card could cost you. 

Remember: Everyone’s situation is different, and using your card may make sense in some cases. For instance, if you’re trying to meet a minimum credit card spend to earn a generous welcome bonus and can afford to repay your balance in full, using a credit card could be a wise choice. Just ensure the rewards you earn will offset the cost of any fees or interest.

We’ve summarized our findings in a table, but you can find more information about each specific expense in the sections below.

Expense	Credit card payment accepted?	Fees charged?
Rent or mortgage	Not by most companies	Up to 3.5% (using workaround third-party payment services)
Down payment or earnest money for home purchase	Not by most lenders	N/A
Investments	Not by most reputable brokerages	N/A
Student loan payments	Not by federal loan servicers; Accepted by some private lenders	Processing fees (vary)
Car or vehicle	Accepted by some dealerships	Processing fees (vary)
Taxes	Yes	Up to 1.98%
Utility bills	Yes	Processing fees (vary)
School tuition and expenses	Yes	Processing fees (vary)
Donation	Yes	Vary by organization
Medical bills	Yes	Not typically
Engagement ring	Yes	No
Wedding	Yes	No

1. Rent or mortgage payment

Paying your mortgage or rent with a credit card is often unwise. Many mortgage and property management companies don’t accept credit card payments. 

Certain third-party services offer a workaround to pay these expenses with a card, but these services charge high fees of up to 3.5%. These fees can add up and negate any rewards you earn using your card.

2. Down payment or earnest money for home purchase

In most cases, you can’t make a home down payment or an earnest money deposit with a credit card because lenders don’t permit it. 

3. Investments 

Most reputable brokerages don’t allow you to invest with a credit card. Since investments come with the risk of loss, using your card for this purpose is unwise. 

4. Student loan payments

You can’t pay federal student loans with a credit card, but you can pay certain private student loans with a card. In addition to the interest you’d pay to do so, be aware of processing fees. These can add up depending on your monthly payments and the percentage your lender charges.  

5. Car or vehicle 

While some dealerships may accept credit cards, many also charge processing fees. And there may be a maximum you can spend. 

For instance, you may be unable to finance your car’s entire cost, but a down payment is an option. 

However, just because you can doesn’t mean you should. Processing fees for large purchases can be high, as well as the high interest if you can’t pay it in full immediately. 

6. Taxes 

If you owe Uncle Sam after filing your return, paying your taxes with a credit card can be tempting. But you’ll often pay processing fees to do so. Fees vary depending on the platform you use to pay your taxes, but they may cost almost 2% of your total tax bill. 

7. Utility bills 

Many utility companies charge a processing fee for paying bills with a credit card. Generally, it’s wise to avoid charging your electric, gas, water, and other utility bills. 

8. School tuition and expenses

Putting your school tuition on a credit card is rarely a wise financial move. Most schools charge processing fees when you use your card, so the added fees will increase your costs. 

9. Donation

You could donate using a credit card, but it is often not the best use of your funds. Your favorite charity may not even get your whole donation because most credit card issuers charge fees for donating on a credit card. It’s often better to write a check or give cash. 

10. Medical bills 

If you can’t repay your medical bills in full at the end of the month, it often makes sense to avoid putting them on your credit card—in turn, avoiding the high interest charges. 

Instead, consider working out a payment plan with your healthcare provider. Or if you can qualify for a credit card with a 0% introductory offer or take advantage of deferred-interest financing through your provider’s office, a credit card may make sense. 

11. Engagement ring 

According to The Knot’s 2022 Real Weddings Study, couples spend ​​$5,800 on average for engagement rings. Putting your engagement ring on your credit card may be unwise unless you can pay it off immediately. 

12. Wedding 

While putting a portion of your wedding costs on a credit card can help you pay expenses upfront, the long-term cost of high interest charges may not be worth it. 

Let’s say you charged $10,000 to help pay for the venue, and your card has a 21% APR. If you pay $200 each month toward your balance, you’ll spend 116 months repaying it—and your total interest charges will be more than $13,000. 

Risks of credit card misuse

If it gets out of control, credit card debt can harm your financial health and well-being. Growing balances will result in interest charges and added stress, and they could also harm your credit. Your credit utilization—the credit you use relative to the total available—factors into your credit scores. When your credit utilization increases, your credit score may decrease.

Poor credit can make qualifying for a new loan or credit line with favorable rates and terms difficult. It could also affect your ability to get a new apartment because many landlords consider your credit when you submit rental applications.

It’s easy to get in over your head with credit card debt because many issuers compound interest daily. Interest charges can add up, making it difficult to pay off your balances. 

If you can’t repay your credit cards in a reasonable time frame, your issuer could send the defaulted debt to a collections agency. Unpaid past-due balances could result in long-term damage to your credit and a lawsuit or wage garnishment by the collections agency.   

Be responsible with credit card spending regardless of the use

It’s a wise financial move to exercise restraint with your credit card spending and repay your balances in full each month. This can help you avoid interest charges, keep your credit utilization low, and preserve your credit health. 

It’s also wise to avoid paying processing fees on credit card transactions because the fees can get expensive. For instance, if your school charges a 2.9% fee for putting tuition on a credit card, that could add up to several hundred dollars depending on your total bill. 

Since everyone’s financial situation differs, putting significant expenses on your credit card may sometimes make sense. But only go this route if you can afford it, or the rewards you earn will offset any costs you incur. 

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