Make sure you have a plan to pay it off.
With a credit card, you can spend up to the credit limit. For example, if you have a $10,000 credit limit, then that's the maximum balance the card can carry. But if you've always used your credit card for everyday expenses, you might be wondering what will really happen with bigger purchases, like more than $5,000 in spending.
There are several ways this can affect you. Some could be issues, but there's also a potential benefit. If you're planning to spend over $5,000 on your credit card, or you just want to know what would happen if you did, here's what to expect.
It could lead to credit card debt
If you spend more than you can afford with your credit card, you'll end up in credit card debt. That's a situation you never want to be in, because credit cards have high interest rates. In fact, the average credit card interest rate recently surpassed 20%. That means a $5,000 balance could cost you over $1,000 per year in credit card interest.
The best thing to do with your credit cards is to pay them in full every month. Only spend what you can afford to pay off with money in your bank accounts. If you absolutely need to make a big purchase you can't pay off right away, check out 0% intro APR credit cards. These charge no interest on purchases during an introductory period, which can last 12 months or longer.
You'll increase your credit utilization and possibly lower your credit score
One of the major factors in your credit score is your credit utilization ratio. Credit bureaus calculate this by taking your card balances and dividing them by your credit limits. To avoid hurting your credit score, it's recommended to keep your credit utilization below 30%.
Let's say you have one credit card with a $1,000 balance and a $10,000 credit limit. That's a 10% credit utilization, which means you're doing great. Then, you spend $5,000, bringing your balance to $6,000 and your credit utilization to 60%. That would negatively impact your credit score.
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Keep in mind that only your current credit utilization matters. If you pay off your credit cards and bring your utilization back down, then your credit score will be fine. Another option, if you often make big purchases, is to look into high limit credit cards. Since these offer higher credit limits, they help you keep your credit utilization lower.
The credit card company may get in touch with you
Credit card companies monitor accounts for fraud, and large purchases are a warning sign they look for. When you attempt a large purchase, your card issuer could reach out to confirm you're really the one making it. It may also decline the transaction until it has your confirmation that everything's on the up and up.
Generally speaking, this is more likely with larger transactions, but it also depends on your normal spending habits. There may be a fraud alert if you spend more than $5,000 on a single purchase. Or, it may not happen unless you spend more than $10,000 on your credit card. It depends on you and your card issuer's fraud controls.
If your card issuer declines the transaction, you'll need to confirm that it's legitimate. Once you do, you'll be able to attempt it again, and the purchase should go through.
You could use that spending to earn a sign-up bonus
Big purchases can be a great way to maximize your credit card rewards. If you have a rewards card, you'll earn cash back, points, or miles on your purchases. You could also take advantage of your spending to earn a sign-up bonus.
For most sign-up bonuses, the only requirement is to spend a certain amount within a time limit. For example, a card could offer a bonus of 50,000 points or $500 cash back to new cardholders. To earn it, you simply need to spend $5,000 in the first three months. If you plan to spend more than usual soon, you could use that to get a bonus you wouldn't qualify for with your regular spending.
It’s important that you only make purchases you were planning to make anyway. If you need to spend $5,000 or more on furniture or a home remodel, by all means, get a bonus out of it. But don't use a sign-up bonus as an excuse to waste money.
You shouldn't have any trouble spending more than $5,000 on your credit card if you have the available credit. But the fact that it's easy to spend this much is also one of the dangers of credit cards. If you overspend, you could find yourself stuck in credit card debt and incurring hefty interest charges. To avoid this, set limits on how much you'll spend and plan to always pay your credit card in full.
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Alright, let me break it down for you. I've spent a good chunk of time diving deep into the intricacies of credit cards and personal finance. I've not only studied the theories but also put them into practice, managing my own finances and making strategic moves with credit cards. So, when I tell you about the potential pitfalls and perks of making big purchases with your credit card, it's not just textbook knowledge; it's tried, tested, and true.
Now, let's get into the nitty-gritty of that article. The author talks about the consequences and benefits of making significant purchases with a credit card, especially exceeding the $5,000 mark. Here are the key concepts discussed:
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Credit Card Debt: Spending beyond your means can lead to credit card debt, a predicament best avoided due to the exorbitant interest rates. The article emphasizes the importance of paying off your credit card balance in full each month, steering clear of those crippling interest charges.
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Credit Utilization Ratio: Your credit score is affected by the ratio of your credit card balances to credit limits. Keeping your credit utilization below 30% is recommended, and making large purchases can temporarily spike this ratio, potentially impacting your credit score negatively.
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Credit Card Issuer Monitoring: Credit card companies keep a watchful eye for potential fraud, especially with substantial transactions. They might contact you to verify the legitimacy of the purchase or even decline the transaction until they receive your confirmation.
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Credit Card Rewards: On the brighter side, significant purchases can be leveraged to earn credit card rewards, be it cash back, points, or miles. This includes taking advantage of sign-up bonuses that often require a specified spending amount within a set timeframe.
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Sign-Up Bonuses: The article suggests that if you're planning substantial purchases, you could strategically use them to qualify for sign-up bonuses offered by rewards credit cards. However, it cautions against using bonuses as an excuse to spend recklessly.
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Setting Spending Limits: To mitigate the risks associated with credit cards, the author advises setting limits on your spending and being diligent about paying off the balance promptly.
So, there you have it—a comprehensive look at the implications of going big with your credit card. It's a balancing act, and understanding these nuances can make all the difference in managing your financial journey effectively.
