3 Terrible Choices We Make With Credit Cards That Feel Smart at the Time

Credit cards can earn rewards, cover your shopping or travel with valuable insurance, and even get you into airport lounges and exclusive events. But using them can come with risks. Since they let you borrow money without much friction, using a credit card could easily put you into debt, not to mention hurt your credit score if you charge more than you can pay off.

But credit card debt isn't the only risk you face as a user. In fact, sometimes you make a credit card decision that feels smart at the time but, over the long run, has an effect that runs opposite to what you intended. Let's take a look at three.

1. Hoarding cash back

Saving your cash back for a rainy day may seem like a wise choice. After all, having $200 in cash back could help you weather an unexpected expense or give you some shopping money to splurge when you're on a tight budget.

Truth is, credit card cash back isn't immune to inflation. Just like the purchasing power of a dollar erodes over time, your cash back becomes less and less efficacious the longer you hold on to it.

If you want to save your cash back for a large expense, consider depositing it as cash into a high-yield savings account. That way, the interest you earn on your cash back can help you keep pace with inflation. Most cash back credit cards will let you redeem cash in this way, either as a deposit into your bank account or as a check you can deposit yourself. This would be more lucrative than letting it sit unredeemed in your credit card account, though, to be sure, you have to pay taxes on savings account interest.

Another method is to "earn and burn." This involves applying your cash back as a statement credit as soon as it's credited to your account. In this way, inflation doesn't have enough time to erode your dollar. This is the method I use, which is convenient and gives me the quickest rebate on my purchases. The only rewards I save are miles or points, which typically don't have great redemption value as cash back anyway.

2. Manufactured spending

Every now and then, credit card users find creative ways to earn rewards or cash back without spending a dime from their checking accounts. Otherwise known as "manufactured spending," this practice involves getting cash or a cash equivalent with a credit card without incurring any fees. You can generate rewards with the purchase, and then use the cash or cash equivalent to pay off the balance.

For example, banks will sometimes let you fund a new account with a credit card. Usually, there's a limit, like $1,000, and you can only fund it upon opening. Meanwhile, credit cards will sometimes treat this one-time funding opportunity as a purchase with the cash back rate applied. So, if you open a bank account and put $1,000 on a credit card that earns 2% back, you would walk away with $20. Likewise, if you found a bank that let you put $5,000 on a credit card, you could walk away with $100.

The problem with manufactured spending is that it's very difficult to keep up. As you can imagine, credit card issuers do not take well to manufactured spending, and they're constantly changing their policies to nip it in the bud. For instance, many credit card companies are starting to treat the one-time funding of a new checking account as a cash advance. Because cash advances don't have a grace period, their interest charges could instantly ruin a manufactured spending strategy.

All in all, this is one practice that certainly feels smart at the time but can come back to haunt you later, especially if you spend a large amount only to find out you can't get cash or cash equivalent like you expected. You would have to pay off your credit card balance through other means, like your emergency fund.

3. Using your card's installment plan

Credit card installment plans help you avoid credit card interest by breaking large payments into smaller amounts. Though it might be the smartest choice in some scenarios, I would caution against using it habitually.

Most credit card installment plans charge a monthly fee, often a fixed percentage of the original purchase. Though the fee will likely be cheaper than what you would have paid in interest over the same period, it could also be costly. What's more, the charge will still take up your credit limits over the installment period. This could increase your credit utilization and lower your credit score.

Of course, I understand that sometimes you need to make a large purchase with your credit card in which case the installment plan could save you money. But look into the fees first and compare them against other options, as credit card installment plans aren't always the cheapest route. In some cases, you might be better served with an intro 0% APR credit card.

All things considered, these three tactics may seem smart but might not produce the effect you want. Take a second to reflect on your own strategies and see if you're practicing something that, over the long run, actually works against your goals.