Corralling Your Credit Card

So I feel your heart torn… why give up the convenience of your credit card for all of that paper money? It is just so easy to swipe and go. It is also almost impossible to buy something online without one, or to rent a car. There are many reasons for having a credit card in our society. Credit cards also help your credit score in demonstrating your credit history. How old your card is, and if it has been kept in good standing are two variables that help to determine your credit score. You can keep your card in good standing by simply using it occasionally (like once every six months to keep it from going inactive) and paying your card balance on time. It is also a good idea to not have high balances if you are looking to get a loan in the near future as that will affect your debt to credit ratio, which also affects your credit score. And if you have read the entries in my blog on debt, it is also a good idea to not have high balances just because it is not a good idea. Period. But basically, credit cards are not all bad, and especially in business, they can definitely be an asset. The key to credit cards remaining an asset instead of a financial liability is in how they are managed, and that makes a world of difference.

If you are one of the people who hate cash and are determined to use a credit card then today’s blog is for you. If you are going to use credit cards then I want to set you up for success. Matt and I do a mainly cash system, but we also occasionally use credit cards. Mainly Matt uses it for convenience, for business purchases online, and we use it for large purchases. But here is the key to successfully managing your credit card: never make a purchase that is not backed by cash in hand. I have witnessed so many people making purchases on credit cards based on speculation of a check coming, or a bonus at the end of the year only to be very disappointed when the money didn’t come through or something else came up and left them in a hard financial position with credit card debt as a result. It is a dangerous gamble to buy on “spec”. I think it is safe to say that you will get burned the majority of the time, because things rarely go according to plan. Especially when your plan depends on other people coming through.

So from this foundation of a cash-in-hand mentality, it is possible to manage your credit card responsibly. The first thing to do is to start a ledger for your credit card. Just get a bank checkbook register and use that to track your credit purchases. It will take more “paperwork” time and management then the cash/envelope system, but it is easier in the checkout line. So every time that you use your credit card you would write in the purchase into your register and designate a category from your budget for that expense. So let’s say that you spent $60 at the gas station. You would write $60 into your ledger and then add it to your account balance in your credit card ledger. You would also write on your printed budget -$60 beside gas money and subtract it to track your spending. Then when you go to pay your credit card, the $60 would still be in your bank checking account because you are not using anything from that account that is not budgeted. So you would simply pay the $60 credit card bill and then write the payment into your credit card ledger as a -$60 bringing your balance in the ledger to $0. So you will never use your card without then taking the time to track how you are paying for your purchase. Just remember, it either is in your budget, has to be drawn from savings, or it will end up as debt.

Now if you have a program like Quicken, or Money, this whole process of tracking your purchases is a lot easier. It actually replaces the written Credit card ledger because you can simply download your purchases into the program’s ledger. However, sometimes it can take purchases days to show up on your credit card, even weeks if it is an online order, so I manually enter all of my credit card purchases to make sure that I do not forget a purchase and spend the cash that I have “backing” that purchase before it posts to my credit card and subsequently to my Quicken register. Also, as I manually enter it, it gives me pause to subtract it from the appropriate category in my budget to make sure that the funds are always there to cover my credit card balance in full. Because we mostly use cash, I will take the cash from the appropriate envelope and put it in a “To be deposited” envelope that I will then deposit back into my bank. Then twice a month when I sit and pay my bills I first go and pay my credit card bill with the funds that are waiting in my checking account for those purchases. I do not wait for my credit card statement because I have found that it is too easy to loose track of your spending when you wait an entire month to pay your card.

The reason that Matt and I use our credit card to make large purchases is that we have a card that pays us cash dividends on all the money we spend. So for us, getting 3% back in cash on a large purchase is a good deal. However, once again we never spend what we do not already have in hand. Many times large purchases will come from our savings account because we will have been planning and saving for them and so we will then immediately transfer from our INGsavings the necessary funds to cover those purchases and pay our credit card balance.

In fact, several years ago when we first got our dividend card we decided to try to start using our Credit card for all of our purchases. It pays up to %5 for gas and grocery purchases and we just felt like, “Why not try it?” We had always done the cash/envelope system but we were game for getting money back. So we started a credit card ledger (we didn’t yet have Quicken) and I tracked all of our purchases, just like I have detailed to you in this blog (with a couple of exceptions). However, what we found was that we had no real boundary for when to stop spending in a category. With each passing month it just became easier to say, “Just put it on the card, we’ll figure it out later.” So we would get to the end of the month and go to pay off our card and would be a couple hundred of dollars short! It is astounding how “miscellaneous” purchases add up so quickly. We would then find ourselves in a position where we were borrowing from the next paycheck and month to pay for last month and so we would then be even more short the next month. Then we would take money from savings to try to get even again. We finally realized that it was just too tempting for us to overspend without the definite boundaries that the cash system provided. So even though we were making money by using the dividend card, we stopped using our credit card for our discretionary spending and went back to the cash/envelope system.

However, even though it didn’t work well for our family, it may work for yours. There is not just one answer for every financial situation. I think if you have a program like Quicken or Money, this will give you a tremendous advantage in succeeding in staying on top of your credit card. In addition if you are frequently managing what is on your card and where the money is coming from and not just waiting until you get your statement, I think you will also have a better chance of succeeding than we did. Yet never forget that your credit card is a wild horse just waiting for a chance to run away from you. The only safe place for it is in the “corral” of your budget. And if you ever do find yourself starting to get frivolous with your credit card spending and feel like it’s getting out of control, just remember, it’s never too late to try cash. 🙂