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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Thanks for the great comments, everyone. I, too, am a fan of the points you can accumulate with credit cards. So far, using credit cards to buy things that are in our budget, we’ve been able to use points to get a new bike for our 7-year-old, a digital video camera, and several gift cards.
And here’s one other point in favor of credit cards. The no credit card advocates usually say debit cards are far better. However, there’s been a lot of concern about debit card security, especially in light of the problem at Michael’s. There was a good article in the Chicago Tribune this past weekend noting that credit cards have certain protections not offered by debit cards.
I’m with Jenny (and all four of Matt’s points). Plus, though checking and savings accounts are earning next to nothing in interest right now, for 30 days I’m still earning “something” on the cash I eventually spend in a lump sum at the end of the month when I pay my card off in full. If you’re disciplined, using a credit card is a no brainer.
I think you are leaving out the best point yet for HAVING a credit card—earning easy money or airline tickets. I just got 1400.00 in cash back for charging all our gas, groceries, business items, etc. Anything I can charge without a fee I do & of course pay it off monthly to earn the rewards.
Matt. Great article. I especially like #4!!! One of our Money Game Principles (rules to the money game) is “If you can’t afford it in cash, you can’t afford it at all.” Keep up the great advice…
I agree with you on all four counts. Now regarding not even owning a credit card, I have found that many hotels/motels/dinner shows, etc. won’t take a debit card to hold a reservation. I have a credit card and use it for reservations and unexpected auto expenses so I can drive to work, then I diligently pay it off with a budgeted payment set aside. If I don’t have a card balance, the budgeted amount goes into savings for that “rainy” day, which always comes!