10 Ways You Should Never Use Your Credit Card
1. Buying stocks
When buying stocks with a credit card, the purchaser needs to balance the potential return against the potential cost — that is, interest and other fees from accounts that aren’t paid in full each month. Since the inception of the S&P 500 in 1928, the companies listed have returned an average rate of about 7% annually, when adjusted for inflation. According to the Federal Reserve, the average interest rate for credit card accounts that assess interest is 15.54%. While some cards may offer 0% APR for a limited period of time, rates can reach as high as 25% or more, depending on the card and on a person’s credit rating and payment record. Unless the card account is kept current, there is literally no percentage in buying stocks on credit.
2. Buying anything from unsecured websites
This one is just common sense. Sending credit card numbers or any other personal information to a website whose address begins with HTTP (for hypertext transfer protocol) instead of HTTPS — the “S” means secure — is risky behavior. Not all HTTP addresses are compromised, but the chances of your credit card information and other personal data being intercepted by “man-in-the-middle” hackers are greatly increased with HTTP sites, especially when you use your computer in a public place, like an airport or a coffee shop.
A properly configured HTTPS connection obscures user data, assures that the user is connected to the “real” website in question and not an impersonator, and ensures the integrity of data transferred between user and website.
3. Charging business start-up expenses
What is wrong with using cards to get a business started? It has certainly been done often enough. Film director Kevin Smith spread expenditures across “about a dozen credit cards” (he told Stephen Lowenstein for his book “My First Movie”) to finance his debut feature, the 1994 cult hit “Clerks.” Brian Chesky, co-founder of Airbnb, racked up $25,000 in credit card debt to launch the game-changing hospitality site in 2007. There are countless other examples.
Sometimes, the gambit pays off, obviously. But often it does not. Advisors say that using credit cards makes sense if you know that you can pay off the debt in a timely manner — for instance, if you need to buy inventory that you can turn around quickly and sell for more than you charged. Otherwise, interest rates and potential penalties are too high to make this kind of financing worthwhile.
4. Making down payments on anything
It is tempting to use a credit card to make a down payment on a car, a boat, or even a house. Think of all the points or airline miles you can accumulate! But unless you are using the card just to get the points and can pay off the whole amount charged as soon as the bill comes due, this is not a good idea.
The APR on new car loans is currently 5.05% over 48 months, 4.99% over 60. Very few credit cards offer rates that low, so the wiser financial approach would be to make the smallest down payment possible with cash and finance the balance. If you do not have the cash, maybe you cannot afford the car. (Not all car dealerships — CarMax, for example — will let you use a card, anyway.)
Charging the down payment on property is an even worse idea. Few people have credit card limits large enough to come up with the typical house down payment of 10% to 20%, and even those who do would likely see a negative impact on their credit rating. Maxing out even one credit card could trigger a 40 points or more drop in your FICO score, a metric used in more than 90% of lending decisions in the United States. In any case, you cannot charge a house down payment directly on your card: It has to be done by means of a cash advance, which is also a bad idea (see No. 10), or through a mobile payment service like Venmo, which will add a 3% surcharge to your payment.
5. Making “sin” purchases
Credit cards can be used at sex shops, on porn websites, and even to hire the services of prostitutes. Billing from these sources may be disguised as “consulting fees” or something equally anonymous, but all card purchases are recorded on a virtual database, and hackers and law enforcement can usually trace the charges back. You should also bear in mind that you can be more easily discovered if you use your card to buy gifts meant for someone who is not your mate of record — or to use it to pay for motel rooms or fancy dinners in places you shouldn’t be. A good rule of thumb is that if you would not post it on your social media, you should not put it on your credit card.