Guide to Credit Cards: How To Avoid Overspending With Credit Cards
Because credit card companies make money from people using credit cards, they encourage their customers to spend. For many people, that means that credit cards encourage them to overspend. Overspending means at best that you don't save enough, and at worst that you get into debt. If you're a Low-Discipline Credit Card User, credit cards still make sense for you, but you need to regain control over your spending.
How do you do that?
We've seen that the main reason why credit cards make it so easy to overspend is psychological: at the moment that you are tempted to spend money with a credit card, there's nothing to remind you that you have a budget. So to regain control of your spending, you need to remind yourself that you have a budget at, or close to, the time when you make purchases. Here are some ways to do that:
1 Keep a running tally in writing of your weekly or monthly spending versus your budget, and update it before each purchase. Pros: You can still use your credit card for all purchases, and pay your credit card bill (in full) at the last possible moment. Cons: Managing a running total of your spending is a hassle, particularly when you need to update it for small items. That tempts you to exclude small items, but in practice they can make a big difference to your spending.
2 Use an online bank account to keep score of your spending. Keep your credit card receipts when you make purchases. At the end of each day or couple of days, use an online bank account to pay the credit card company for the amount you spent. Seeing your balance fall in line with your credit card spending should help you to keep to a budget, and eliminate risk that you overspend during the month. Pros Since many banks offer free online bill pay, this shouldn't cost you anything. And you can still use your credit card for all purchases. Cons: Some credit card companies limit the number of payments you can make during a month. Paying your bill early means that you lose the profit from leaving the money in an interest-bearing bank account until the payment due date.
3 Limit your credit card use to certain categories of spending. Use your credit card to pay only when there's no risk you will overspend. So use it for regular bills, groceries, and expenses where you trust yourself. For areas where you suspect you overspend or spend on impulse, use cash. Take out a certain amount of cash each week, and try not to exceed it. Pros: Less time consuming that keeping a written tally or making regular online payments. Cons: You have to carry more cash around. You fail to earn rewards on purchases you make with cash.
Once you've got your credit card spending under control, you're ready to ensure that you never borrow on your credit card again. That's what we'll deal with next.