Are Credit Cards Bad? How to Budget Effectively with Credit Cards
Credit cards definitely have a bad rep and I can understand why.
Banks earn money when individuals are in credit card debt. How? The interest rates and fees they charge for being in debt can be an exorbitant amount. But is there a way to use credit cards effectively and avoid paying large amounts of interest each month? There is, so let’s talk about it.
One of the things I want to always stress is credit cards are not an unlimited source of funds. Your credit limit is what the bank or credit card issuer is allowing you to spend on that card, but you don't get a “free pass”. If you spend up to the limit or any amount using a credit card, you must pay off this amount or you will be penalized with additional costs, which were mentioned above.
To avoid credit card debt and maximize my credit card usage, here are some tips I recommend on how to budget effectively with credit cards:
1. Track credit card usage: One of the mistakes I see many people make is using their credit card as an unlimited source of funds; swiping it for every purchase, essential or non-essential with no plan of paying off the balance. To avoid going into debt using a credit card, you need to create a system for tracking your credit card usage. Individuals who avoid budgeting or creating any money management system, may find it hard to effectively use credit cards responsibly, because they are unaware of their overall spending in comparison to what they can afford.
Tip: Create a functioning budget and track each credit card transaction in your budget as they occur. This allows you to essentially use your credit card(s) as a debit card, by ensuring you are only spending what you budgeted for the month
2. Create a payoff routine: By creating a consistent routine for paying off your credit card balance(s) in full each month, you will easily avoid interest and fees, while having the added protections that credit cards have to offer. Your payoff routine can look like the following: Making weekly payments every Sunday to pay off the previous week’s expenses or making bi-weekly payments based on your pay schedule to pay off the previous two week’s expenses. This will allow you to properly manage your credit card usage and ensure you are not overspending or going into debt
3. Rewards: It’s no secret that credit cards often offer various perks and benefits, such as cash back rewards or travel benefits. To maximize rewards using credit cards, you should always select a credit card that fits your needs, so that your everyday, budgeted spend will yield rewards you can utilize to your advantage. Review interest rates (if you manage your credit card usage well, this would not matter), overall benefits, annual fee amounts and more prior to selecting the right card for you. However, if you are unable to use credit cards appropriately, obtaining a credit card just for these perks will not be worth it. If you are just getting started with using credit cards, you may also want to only use a credit card for specific purchases, which may help with selecting the right card for you. For example: Using a credit card only to purchase groceries, pay your monthly phone bill or utilities. You may research cards that provide the best rewards for those type of expenses
As a responsible and heavy credit card user, I am definitely pro credit cards when you can use them responsibly. Managing your finances will help you to create a system where you too can use credit cards to your advantage!
Here's some additional blog posts:
TEN MONEY MANAGEMENT TIPS
https://www.itsfinanciallywinning.com/blog/moneymanagement
