Business Finance

The Problem with Using Credit to Pay for Living Expenses

It’s easy to slip into the habit of putting everyday purchases on a credit card, especially if money is tight, or you’re trying to rack up rewards. Staying on top of credit card bills can soon start to feel like running on a treadmill on which the speed you have to run keeps getting faster, even though you’re not gaining ground.

Here are a few key reasons using credit to pay for living expenses is not optimal over the long term.

Credit Card Debt Is “Bad” Debt

At first glance, all debt can appear pretty much the same: You owe money. But some debts are better than others — like those capable of paying for something that will likely become more valuable over time. Perhaps the most obvious example of this so-called “good debt” is a mortgage.

On the flip side, “bad debt” pays for something that will not bring a return on investment. Charging living expenses to a credit card is a prime example of this. Once those items are bought and consumed, they’re gone and you’re out the money you spent. If you find yourself having to take on increasing amounts of credit card debt to stay afloat, it’s time to dig into your budget and look for opportunities to change your spending habits

This is especially true if you’re dealing with growing debts. Meeting with a credit counselor at a not-for-profit agency is one way to get some helpful advice in this department — and figure out how to address your outstanding debts.

You’ll Pay Interest on Everyday Purchases

New credit cards carry an average interest rate of around 19 percent, while existing accounts have an average rate around 15 percent. Unless you’re paying your balance off in full every month, you’ll risk running up expensive interest charges on everyday items if you put them on credit.

Since credit card interest typically compounds — or accrues interest on principal balances and interest — it’s very easy to get caught in an expensive cycle of continually mounting debt this way. The more interest accumulates, the longer it takes to pay down the outstanding balances and the more it’ll cost to do so. This is especially true if you find yourself paying only the minimum balance due each month. Paying only a small percentage of the balance due or a nominal flat fee can extend the lifetime of credit card debt by years and cost hundreds or thousands extra in interest over that time period.

There are a few ways to go about tackling exorbitant interest on credit card accounts. Enrolling in a debt management plan through a credit counseling agency may earn you interest reductions. Taking out a debt consolidation loan from a bank or online lender and using it to pay off higher-interest debts can reduce the overall amount you’ll pay, depending on the terms of the loan. Conducting a balance transfer to a new card with zero-percent interest can help you earn an interest-free grace period. Debt settlement through a program like Freedom Debt Relief may help you get both reduced interest and a reduced balance as well.

The takeaway? Paying interest on everyday items can get very expensive very quickly, and fails to return value over time.

Your Credit Utilization Ratio Will Go Up

Credit utilization measures how much credit you’re using vs. how much is available to you, per card and cumulatively. To find this figure, divide your credit card balance by its limit — then do so for all your cards collectively. A good rule of thumb is to try to keep utilization under 30 percent. Since credit utilization is factored into your credit score, running up high balances on everyday items can have a negative effect.

Using credit to pay for living expenses can cause you to amass debts with interest, exceed the recommended utilization rate and have little to show for it in terms of value.

 

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