There are some personal finance teachers who believe no one should have a credit card. They seem to think that carrying credit cards is like carrying little sticks of dynamite that could blow your finances to smithereens at any time.
While there are definitely some people who would be better off not using credit cards, most people can use plastic without self-destructing. Here are four key steps.
1 – Use Credit Cards Only for Pre-Planned, Budgeted Items
If you don’t use a budget, don’t use credit cards. If you do have a plan, though, credit cards can work just fine.
Let’s say you’ve budgeted $75 for clothing each month. And that clothing budget is part of a bigger plan that divvies up your income across all of the expense categories in a way that enables you to be generous, save and invest a portion, and live with margin. You can charge $75 worth of clothing each month.
2 – Record Your Credit Card Spending as You Spend
If you don’t track your spending, don’t use credit cards. If you do track your spending, though, and you record each credit card purchase when you make that purchase, credit cards can work just fine.
If you use an electronic cash flow tracking tool like Quicken or Mint, your credit card spending will be tracked automatically whenever you charge something. If you use a manual tracking system like an Excel spreadsheet or a paper and pencil system, you’ll have to remember to record your spending.
This track-it-as-you-charge-it step is really important. It means you’re treating credit card purchases just like cash purchases, and that’s a good thing. The people who get in trouble with credit cards are the ones who don’t think about what they charged until they get their bill.
3 – Pay Your Credit Card Balance in Full Each Month
If you have a balance on a credit card that you carry from month to month, don’t use credit cards. If you take the first two steps, though, and you pay your credit card bill in full each month, credit cards can work just fine.
Never carry a balance on a credit card. Paying interest on credit card charges is one of the absolute worst uses of money. It’s really easy to dig yourself deep into debt by buying stuff and then paying the minimums. But it’s really, really tough to get out of that debt (believe me, I know). So, don’t go there. Always pay your balance in full.
4 – If You Won’t Take the First Three Steps, Don’t Use Credit Cards
Those who say no one should use a credit card often point to studies showing that people who use credit cards spend more than those who don’t.
For those who don’t have a plan for how much to spend in each expense category, don’t track their credit card spending as they go, and pay less than the full balance each month, it’s really easy to overspend with credit cards. Those are the people who should absolutely not use credit cards.
However, if you take the steps outlined above, credit cards can work just fine.
What do you think? Would everyone be better off not using credit cards, or is it possible to use credit cards wisely?
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