Some people view credit cards as an easy tool to manage regular expenses, and some people think they are a straight path to eternal consumer debt, with no hope of ever escaping. Why the disparity? Is one view more correct than the other? Let’s explore. Undeniably, easy access to credit has caused many problems for many people. Most college students can sign up for all the offers they want (they might even get a t-shirt or a mug!) with no real understanding of how quickly charges and interest add up. Certainly, using a credit card and not thinking about the balance until you receive a statement (and then being shocked at the number) is an easy way to enter the proverbial revolving door without a clear path out.
But for those who last used credit cards 10, 15 or more years ago, they might be worth another look. Technological advances have made it possible to capture the benefits of credit usage while safeguarding yourself against overspending. And many cards offer valuable rewards. In fact, I think credit cards can actually help, not hinder, a lot of clients stick to a budget.
(That means you need to have a budget in the first place - just one number that realistically covers all of your expenses. In general, I advocate a simple approach with this. There’s no need to get too in-depth with a separate number for each category. Ultimately, a dollar spent is a dollar spent, so it’s irrelevant whether it’s spent on groceries or gas or clothing or something else. But you do need to know more or less what that overall number is, and in a future post I will get into more detail on how to determine that. But really, a budget should be determined regardless of how day-to-day expenses are handled.)
Here are some of the ways you can protect yourself against overspending:
- Many card issuers allow you to set up text alerts for daily balances, large purchases, or when you exceed a particular spending level. Many also have apps that make detailed transaction information available anytime.
- Lacking that, apps like mint.com that aggregate your accounts in one place will allow you to set any alert you want for any linked account.
- Use one card only, and use it for as many expenses as you can. Managing one balance is easier than tracking several, and it forces you to reckon with the full extent of spending - if it’s spread out, it’s easier to rationalize overspending.
- Set up a simple spreadsheet projecting your income and expenses for the year, with an item there for credit card payments. You can link this to another spreadsheet used to track your balance, or update it manually. As the balance goes up, your bank balance will go down - in this way, it becomes kind of a hybrid of the best aspects of credit cards (convenience, purchase protection, rewards) and debit cards or cash spending (you can’t spend it if you don’t have it). Once the balance starts getting dangerously close to your budget limit, it’s time to make some decisions about how to stay under budget for the rest of the billing cycle. Need help with this? Contact me!