Can Credit Cards Actually Help You Maintain a Budget?
by Sherry Hao, Controller, U.S. Money Reserve
While it may seem counterintuitive, you can use credit cards to help you stick to a budget. Here’s how.
If you’ve gone down the rabbit hole of personal finance advice, you’ve probably seen numerous articles decrying the perils of credit cards and advising you to try and keep your debt as low as possible. While that is good advice, and the tips and tricks offered in those stories are well worth taking into account, there are actually some aspects of credit cards that can be truly beneficial to your budget. You’re probably scratching your head at that statement, but it’s true. When used responsibly and wisely, credit cards can actually help you maintain a budget. Here’s what you need to know about using credit cards as a financial tool.
Understand the Pros and Cons of Using a Credit Card to Maintain Your Budget
Credit cards are tools. Used wisely, they can help you build your future financial stability. Used irresponsibly, they can cause financial ruin. There are plenty of pros and cons to consider with this method as a way to manage your budget. Here’s what you need to know before you get started.
Pros of Using a Credit Card to Maintain Your Budget
Pros to using a credit card to track your budget include the following:
- You can precisely track how you spend your money. Credit cards offer detailed information about where your cash goes, and their statements often categorize spending. You’ll be able to get a quick look at just how much you spend on things like restaurants, groceries, or your internet bill.
- You can set your own limits and alerts based on your own budget. You don’t have to wait to reach your spending limit on most credit cards; you can set your own limits and have alerts sent to your phone as you get closer to those limits. Try to stay below 30% of your credit limit to ensure that you maximize the balance between using your available credit and not getting too close to your credit limit.
- You can get bonuses through rewards programs. Many credit cards offer various reward offers. You can use reward points for everything from groceries to travel.
Cons of Using a Credit Card to Maintain Your Budget
Of course, credit cards have some significant drawbacks for helping maintain your budget. Here are a couple of the top ones:
- It’s easy to spend on credit cards and never *really* think about it. Therefore, it’s easy to approach your limit on your cards and end up in more debt than you can handle. It’s really important to keep your spending within your means when you’re using a credit card to manage your budget.
- Sorting out your financial books can get a little tricky. If you carry a balance, your budget might not really make sense when you go to rectify it at the end of a month. Say you buy a bunch of Christmas gifts in December, but they don’t show up on your statement until January. Which month do you charge those expenditures to? What if you have to carry over that expense into February as most people do? A good rule of thumb is to keep the expense in the month in which you spend it. If you have to carry a balance, make sure you account for it in your budget.
Once you understand the pros and cons of using credit cards to manage your budget, you can start to understand just how to tackle this financial task. Read on for more.
How to Use Your Credit Cards to Help You Maintain a Budget
Once you’ve gone through the process of setting a budget, which I’ve written about in the past, it’s time to start figuring out how to stick to it. Depending on the time horizon you’ve set, whether it’s weekly, monthly, or yearly, you can start using your credit cards to manage and maintain your budget. Here are the steps to take to start using your credit cards as a budgeting tool.
1. Track Your Spending with Your Cards.
If you tend to overspend but don’t really have any idea where your cash has gone, using a credit card (or even a debit card) to really track your spending can be helpful. Many credit card companies offer different ways to track your spending — but all of them break various types of transactions into easy-to-recognize categories. This feature can really help you get a handle on your spending, right down to the cost of your daily latte or DoorDash habit.
This is a really nice feature to have when you’re setting up a budget for the first time or if you’re trying to narrow down your spending habits to see where you might be able to tighten your belt a little bit. Most banks also offer this feature if you carry a debit card. You can see exactly how your money gets spent each month by looking at your monthly statement.
Spending tracking is also a really great feature at the end of the year when you may start thinking about tackling your financial goals for the new year. At the end of the year, many credit card issuers offer an annual report that shows just how you spent your money.
You don’t have to wait for the end of the year for such reports, either. Most credit card companies allow you to customize the time period on their dashboard, so you can get a better idea of how you’ve spent over the last month, six months, year, or 18 months. You can also see what amount you might carry forward each month so you can get a better idea of whether or not you’re overspending.
Part of tracking your spending means reviewing your transactions regularly. A good rule of thumb is to check in based on the timeline you’ve set for your budget. So if you are on a weekly budget, check your credit card statement once a week. If you’re on a monthly budget, check the credit card statements once a month. You get the idea.
The best way to stay consistent with this is to set aside a specific time each week or month to check in with your finances and find out where you are in terms of your budgeting goals. Regularly checking in is a lot like periodically weighing yourself. It can be really valuable in the long term because it can help you catch small overspending trends early and help you get back on track before things get wildly out of hand. As I mentioned above, because credit cards make spending so seamless and easy, it can be very easy to overspend without realizing it. Checking in regularly can help prevent and lessen this.
2. Set Realistic Spending Limits.
If you stick to the popular 50/30/20 budget where 50% of your income goes to essentials like housing and food, 30% of your budget goes to things you want (AKA nonessentials), and 20% of your take-home pay goes toward your debts, then using a credit card to manage your budget is a great tool. You can use your credit card for nonessentials and use the credit management tools offered by your card to set the right limit for your income and take-home pay to ensure that you don’t go over your 30% limit. It’s best not to exceed this limit so you don’t blow your budget.
You can also decide to use your credit card for essentials if it makes sense for your budget. Say you set a budget of $500 a week for groceries. You can set your credit card alert to $500 and make sure that you stay within that limit each week if you use your card for groceries only.
A credit card is a great tool to manage any kind of expense — just be sure to use it wisely and not overspend.
3. Set up Alerts So You Can Manage Your Credit.
Part of using a credit card to manage a budget means making sure that you are utilizing and paying off your debt in a timely manner. Late fees, interest charges, and other penalties can really add up when you’re using a credit card, so it’s best to use your credit card app features to help you remember when your card payment is due or when you’re approaching either a self-set limit or your credit limit.
You can also use your credit card app to ensure that your credit is safe and that no one has opened an unauthorized card under your name. You can set alerts that let you know when something has been charged to your card or if there has been fraudulent activity. This can also help you manage and improve your credit if you’re working on rebuilding your finances.
You can also use other features on your credit card, like freezing a card or account to ensure that no other activity occurs on it, or you can shift the payment due date if you need to. Numerous tools are available that can help you attain your financial goals in a way that works for you and your budget.
The Bottom Line on Using Credit Cards to Maintain Your Budget
When it comes to building and sticking to a budget, finding the right tools for you can be the key that unlocks the kingdom. In some cases, that might mean using a credit card to manage your spending. Once you have a handle on the pros and cons of managing your budget with a credit card, you can jump in and start using credit cards as a tool to help keep you on track. You can do everything from setting spending limits and shifting due dates to tracking spending on a credit card. These tools can prove really useful when you’re trying to find what works for you. When used wisely, a credit card can be a great tool for managing and maintaining your budget and keeping you on the right financial track.