One trap that many of us fall into is thinking about spending money and using credit as different, when both affect our monthly budget. We may buy something on credit that we would never consider paying cash for. We might even buy things using a debit card, essentially the same as using cash, that we would think twice before we handed over actual bills.
I've been using Quicken to keep track of my budget for the last several months, and one of the first things that struck me was how it categorizes every dollar I spend as an expense, whether it was paid for using cash, check, my debit card, or a credit card. If I spend $50 at the grocery store, it is reflected in my food budget no matter which card I used.
A credit card is a great tool to have in an emergency. If you have a flat tire, you need to get it fixed and don't want to worry about whether you are going to bounce a check or not. Using a credit card allows you to pay off this unexpected expense over a couple months. Credit cards can also be useful for online purchases since they provide more protections than a debit card. But, many of us use our credit cards far more routinely. Any time an expense which doesn't fit right into our budget comes up we charge it. Sometimes we do this because something is on sale and we want to lock in the price. It is very easy to run up a balance on the card, and then we are wasting money on interest payments rather than on things we actually need.
When you go to pay for something with a credit card, ask yourself if you would buy the same thing with cash? Since you will probably end up paying interest on your purchase, ask yourself if you would pay half again as much in cash? Stop thinking of the credit card as a way to avoid paying for things out of your monthly budget.
Try to get into the habit of paying off your credit cards in full every month. You can have the peace of mind knowing that you can take care of your family in an emergency without impacting your budget with the expense of interest every month.
About The Author: Fletcher Sandbeck is one of the founders of ThriftyFun. You can usually find him feverishly typing code to make the site more responsive and stable. He is crazy for Legos, has a degree in mathematics, and is always trying to be more frugal.
Do you have any tips on how to think about credit and spending? Let us know in the discussion.
By Anna from Massachusetts
Editor's Note: This should only be used by those that can know they can and will pay everything on time. Check the details of both the credit card and the certificate of deposit closely. Initiation or balance transfer fees can quickly erase any profits that the interest rate difference might yield. Once the introductory period has ended many credit cards will charge 20% interest on the balance transfer (even if the APR on purchases is lower) and some will even back charge penalty interest for the entire year.
And if you are out with the family and need a quick drink or lunch, don't stop at a drive through, go to a gas/convenience store and get the family meal there. Benefits: everyone can stretch their legs, bathroom breaks, healthier food choices, cheaper drink choices, AND the rewards that come with that spending.
Discover is long known as the "card that pays you back", but my Discover cash back rate is 1/4%. I get 20 times that much with my Chase card. And we save all our rewards up over a year's time and then use those rewards to help pay for our annual vacation. You'll be amazed at how quickly you will accumulate rewards!
Store Credit?
The most obvious plus to accepting the credit card is the instant discount. These offers seem to surface when the total at the bottom of the receipt exceeds $100. A $10 discount is tempting and seemingly flawless.
Often these store credit cards send future discounts your way. If managed correctly, they can bring in future savings. Money back for points earned is also a great incentive that comes with the card.
Credit scores are raised when the amount of available credit is larger than the amount of debt. In other words, opening a credit card with a $2,000 limit can be good for your credit score if you don't carry a heavy tab on the card. Likewise, if you decide to apply for the card today but never use it, simply cut it up without cancelling it. This keeps your credit looking strong and eliminates the temptation to create a new bill.
A credit card is a credit card. It may come with annual fees, high interest rates, and the temptation to use it in excess. Be careful. Interest rates on store credit cards are traditionally high. This isn't a problem if you don't carry a balance from month to month. It can be difficult to erase a bill that is created on a card of this type.
The more credit cards you have, the more trouble there is minding the monthly bills. When you entered the store you planned to pay for your purchases in a set way. Now, with the option to open a store credit card, your shopping trip is "free." However, in a month that "free shopping" will reappear. Will you remember that the bill is on its way? What about the other bill from the store across town? Did you remember to save money for the remaining bills that you want to pay down? The more cards in your wallet, the more problems heading your way each month.
Is there an answer to the question posed by the store clerk? "Do you want to apply for our credit card?" she asked. For the shopper who says "yes," be careful. You'll gain discounts. For the shopper who says "no," you'll save headaches.
By Kelly Ann Butterbaugh
I always pay my credit card off monthly. I don't have any "perks" with this card. What card has the best perks offered? I don't fly! I also like paying by direct debit from my checking account. Thanks, Brenda Catherman from Port Matilda, PA
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Credit Cards with Rewards