So how do you manage your credit cards? We live in a world where it is difficult to travel, impossible to rent a car, and just extremely challenging to do a lot of things without a credit card. However, how do you protect yourself from debt, when financial hardship is never more than a few swipes of the credit card away? The problem with credit cards is you don’t have any tangible sense of what you are spending. With cash in your wallet, you know when you are reaching the end of your budget in an area. With credit cards, you can go on spending indefinitely, or at least until you get your statement! And then you find yourself wondering, “How did it add up so quickly and how did I spend so much?” So, how do you reign in this extremely dangerous and temptingly accessible animal that is your credit card?
In tomorrow’s blog I am going to be talking about how to manage credit card debt, but I wanted to start with how to manage your credit cards. Many financial advisors will tell you to get rid of your credit cards all together. Now if you have extreme debt and have difficulty with abusing your credit cards, this may be exactly what you need to do. But for most people, the answer lies in educating yourself as to how to use and manage a credit card. If you are going to live debt free and still use a credit card, you have got to have a plan.
The first step to managing your credit cards is to only carry one card. Put the rest of your cards in a safe place in your home and simplify your wallet and your finances. Now, you don’t want to have a “knee jerk” reaction and cancel all of your cards, because you can actually hurt your credit score by doing that. Your credit score is important because it is what a mortgage company will look at before they give you a loan to buy a house. It determines the interest rates that are available to you when you go to buy a car and can help or hurt you in so many areas of your financial world. Your credit score is based on a lot of factors like debt ratio (how much you owe vs. how much you are worth), and whether you pay your bills on time. It looks at how much revolving credit (the total amount of credit available to you through your credit cards) that you do have, which is why you don’t want to have too many cards open because this can hurt your score. You want to keep the credit cards that you have had the longest account with in terms of time and use. So your oldest cards are the most valuable to your credit score. Yet, for instance, my oldest card is safely filed away. Matt and I only carry two credit cards in our wallets, and we only use one. We don’t use our oldest card because the card we do use has the best benefits (it pays great cash dividends on everything we buy). So essentially, they pay us to use our credit cards, and we pay ourselves by never carrying a balance and paying it off every single month.
The reason you only carry one card is so that it is very easy to track what you are spending, and it also make it very easy to know exactly what to pay off at the end of the month. So this is the next step towards wise credit card management… you must track your spending. You can do this through a program like Quicken or Microsoft Money, or there is even a free online finance tracking program at http://www.mint.com/ These programs will automatically download your spending from your credit card so that you can see exactly where your balance is. Now there are many of you that are already using one of these programs, but you still are going into credit card debt. This is because you are leaving out the next step…
You have to have a plan for every dollar that you spend on credit cards. When my husband or I use our credit card we immediately figure out in our budget where the money is coming from. Credit cards should never be an escape route because you have used up all of the money in your budget. If you are going to use credit cards responsibly, you need to treat them like you are writing a check, only without the possibility of bouncing the check. So whenever we use our card, we immediately go into our bank ledger for our checking account and transfer out the money to cover that purchase on the card. So, in quicken and in my written ledger (again, I do not think it is necessary to keep both, I just like to have a written ledger with me and it is habit) I will write out the purchases as a payment to the credit card. My card only allows me a certain number of payments a month so I will not always make the actual payment right then.., but the important thing is for me to know that that money is gone. You can also track your spending on your printed budget sheet. I am going to do a blog on the best way to do this but basically you want to be able to know when you are done with “entertainment money” even if it is on a credit card waiting to be paid.
Before I started using Quicken, I actually kept a credit card ledger, just like a checking ledger. Every purchase that I made I would write into the ledger and add it up so I constantly knew what my balance was on my credit card. I would write into the ledger where the money was coming from out of our budget to pay for it as well. Then when I made a payment I would write that in and subtract the amount. It may seem like a hassle, but if you do not keep some kind of ledger or tracking program on your credit card spending, you are guaranteeing yourself credit card debt and a very difficult financial journey.
You can look at it this way… either you learn to use your credit cards responsibly by paying them off every single month or you need to stop using them all together. It is very, very easy to get into debt, and so very difficult to get out of. And if you are in debt, you have to take the accessibility out of your debt equation. You have to treat the choice to incur more debt as a serious contract on your freedom, and not just the casual swipe of a plastic card. Credit cards don’t give you freedom, they give you an illusion of freedom that actually just leads to a prison cell. Give up the illusion. If you are in extreme debt, you cannot afford to go any further down this path. You have to get serious about your spending, your finances, and even your addiction to spending. It is possible to use credit cards wisely, but it takes management and you do that through:
1) Only carrying and using one card
2) Tracking your spending
3) Always knowing where in your budget the money is coming from
4) and Never carrying a balance. Pay that card off every single month!
I know somewhere other “financial advisors” would be yelling at me for tolerating credit cards at all. However, I feel like a budgeting plan has to be livable if you are really going to succeed with it. Many of my friends hate carrying cash, and feel like giving out their debit card is dangerous. So to me, not equipping you to succeed and wisely use credit cards is setting you up to fail on a budget. Credit cards in themselves are not the enemy, they just provide a very quick and slippery path to your enemy. Consequently, if they are going to be a part of your financial life you have to be very purposeful in how you use credit cards. And if you aren’t willing to do the work to manage them, then leave your credit cards at home, and save yourself from another shovel load onto your mountain of debt.