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.
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.