Yesterday, I wrote about the many benefits of using credit cards when it comes to any type of purchase. Consumer protections and card benefits are just the beginning.
There are still pitfalls to credit use. Credit card transactions are consistently higher than debit or cash, and credit card companies know this and use it to sell their products to vendors.
You’re borrowing money with the promise to pay it back as some point in the future. Your bank account hasn’t budged. Money hasn’t changed hands (at least not on your end of the deal). And therein lies the problem.
Cash hurts. Credit doesn’t. Until you get the bill 30 days later and the reality of your purchase sets in…and even then, the pain seems dull and remote.
With the potential benefits of credit cards, but mindful of the possible pitfalls, how do we use credit responsibly?
Here is my single piece of advice when it comes to responsible credit card management:
When you spend the money, really spend it.
Huh? Reap the benefits of your credit card, but use it like a debit card! Why is this important?
Our bank accounts (and envelope systems, if you use them) have limits. That’s $0. You can’t spend more than you have available. You can’t abuse it.
Credit cards have limits too, but they’re not limits of what we can afford. They’re what your card company thinks you can pay back…eventually.
The +/- 25 day grace period makes it even harder to really see what’s going on in real-time and let the reality of day-to-day and major purchases sink in.
And – it doesn’t hurt.
So that’s my foolproof method – spend it when you spend it. Here are two simple ways to get it done:
1. Use a Separate Account
I’m not an advocate for opening new accounts and love financial simplicity, but if you choose this method, you have to separate your cash to make it work.
The idea is fairly simple – every so often (after every transaction, daily, or weekly), transfer the amount spent on all of your credit cards from your main checking account to your dedicated checking or savings account. You’ll have to stay on top of it.
This money is holy. In fact, it doesn’t even exist. It’s not a spending fund. It’s not even an emergency fund. For all intents and purposes, it’s gone. It just happens to be there until you send in a payment.
If you can manage that simple psychological leap, I think you can use credit cards responsibly. When you don’t have enough to transfer into your other account, stop.
2. Use an Envelope Budget
An easy alternative if you’re not willing to expand your account structure is the use of an envelope budget.
The idea is exactly the same – separate the money that’s been spent on credit cards with a unique envelope dedicated to credit payments.
The money gets moved from your budget envelope to this new envelope and is also treated as holy. It’s money spent.
The advantage of this method is that it’s not necessary to open any new accounts – just to keep track of the money already is your main account.
Still Tempted?
If you don’t think you can manage to stare at your separate fund all month long without being tempted, get rid of the temptation.
Simply send in a credit card payment once a week for the amount you’ve spent. You’ll keep your balance low and your cash out of sight.
Fiscal Fizzle 
I think the idea of a separate account is a good one, that way you can keep track of it better when you do use the credit card. I think part of responsible credit card use is really getting out of the mindset of “ahh just throw it on the card, I’ll figure out how to pay it later” mentality that is so easy.
I used to be horrible with the cards and stopping my thought patterns on that was a huge step in being responsible for the debt.
Baker has written a great post on his psychology of credit card use over at Get Rich Slowly. The “Do-I-Have-Enough-For-This?” Effect
This is exactly what I do with my credit card, although my method is a little bit different. As soon as I charge something to my credit card, I send in a payment for that amount using online banking – I don’t wait until the bill arrives at the end of the month.
When my bill arrives, it looks more like a bank statement than a “bill”. It has a series of debits and credits, and a zero balance at the bottom…
I get all the benefits of a credit card (points, etc) but the card is effectively working as a debit card, since the money’s coming out of my bank account immediately after the card is charged.
I think that’s a bit overkill for me, but it’s definitely the best way to keep your credit card spending in control, since you’re spending the cash almost instantly. Thanks for sharing!
I don’t think the rewards points — which most ppl don’t even redeem & are paltry considering how much I spend! — are worth the hassle. And it’s certainly not worth it if I spend more than I otherwise would using a debit card or cash, which is the case with most people.
I’ll stick to using my debit card!
That’s certainly one of my biggest concerns, and I’m aware of the statistics which back up your points. Hopefully, with an established envelope budget that doesn’t allow for spending more than allotted and a sizable emergency fund that prevents one-time emergency spending, the possibility of overspending is minimal.
If anything, we’d simply buy less for the same amount of money because we’re less concerned about individual transactions, but still aware of our budget limits.
Thanks for commenting!