It’s easy to go overboard on spending when you have credit cards at your disposal. Here’s how to scale back and avoid debt.Image source: Getty Images.
There’s a reason credit cards tend to get a bad rap. Handing over a wad of cash to pay for a purchase is apt to trigger some sort of warning in your head that might go something like, “Don’t do that.” With credit cards, not so much. It’s harder to equate an innocent swipe of plastic with the actual loss of money, and so we, as consumers, tend to spend more liberally when we have credit cards at the ready.The problem with overspending on credit cards, however, is many-fold. First, when you rack up enough of a balance that you can’t pay it off by the time it comes due, you automatically subject yourself to interest on that sum. That interest will continue accruing until your balance is paid off, and whatever items you charged in the first place wind up costing you more.
Imagine you rack up a $1,000 credit card balance on a card charging 24% interest that takes you two years to pay off. At the end of the day, you'll end up having spent about $1,269 in total, with that extra $269 coming in the form of interest. Talk about wasted money.
Furthermore, overspending on credit cards could drive down your credit score. One big factor that plays a role in determining your credit score is your credit utilization, or the extent to which you’re using your available credit. Once your utilization exceeds 30% -- meaning, you’re carrying a balance that’s more than 30% of your total line of credit -- it can hurt your score. That makes it more expensive for you to borrow money and compromises your ability to qualify for a mortgage, auto loan, or whatever other financing you’re looking for.
This doesn’t mean you should toss out your credit cards and never use them again. There are a number of benefits to paying for purchases on credit cards. First, many cards offer rewards programs that give you cash back or other incentives (think store points or air miles) for purchases you would’ve made anyway. Most cards also offer purchase protection so that you’re covered if the items you buy with your credit cards are lost, stolen, or damaged.
Many credit cards offer price protection as well so that if you buy something and then find that same item for a lower price elsewhere shortly after the fact, you’ll be refunded the difference. Finally, when used wisely, credit cards can help you build credit. Another key factor in determining your credit score is your payment history. If you pay your credit card bills on time every month, that alone will help your score improve.
Since credit cards are a useful tool that can work to your advantage, you should keep using yours regularly, but at the same time, take steps to keep your spending under control. Here are five tactics you can employ to avoid overspending and racking up a costly balance.
1. Know how much spending your budget allows for
Many people get into trouble with credit cards because they exercise no self-control on the spending front. Part of that boils down to not having a budget.
If you don’t have a budget, you’ll have no idea how much you can afford to be spending each month, so rather than navigate your finances blindly, take some time to set one up. To do so, list your recurring monthly expenses (your rent, car payment, utility bills, and so forth), factor in one-time expenses (like annual memberships or subscription renewals), and compare your total spending to the total amount you take home each month in your paycheck. Ideally, you should be in a position where you’re able to save at least 15% of your earnings. So if that’s not happening, you’ll need to make some lifestyle changes.
Either way, having that budget will give you a monthly spending total that you can (and should) aim to stick to when using your credit cards. Let’s imagine that aside from your $800 monthly rent payment, you’re able to charge the rest of your living expenses on your credit card. If after setting aside 15% of your income, you’re left with $2,000, you’ll know that your credit card balance should never surpass that total in a given month -- and that’s better than not having an outer limit at all.
2. Set a monthly spending limit for non-essential expenses
Most of us don’t tend to go overboard on things like medical care or fuel for our cars. Not only are those necessary expenses, but they’re somewhat out of our control. If gas prices go up but you need to get to work, you have no choice but to pay. Similarly, if you get sick or hurt and are stuck with a series of doctor visits to follow, you’ll have to deal with those copays.
Then there are those expenses that are not only non-essential, but also within our control -- things like restaurant meals, non-work clothing purchases, entertainment, and even cable TV. These are the items we tend to overspend on, so to combat that, establish a monthly spending limit for each unnecessary expense that tends to lend to credit card abuse. You might, for example, limit yourself to $150 in restaurant meals and takeout, $50 on apparel, and $100 on movie tickets, concerts, and sporting events. Having these limits in place will help you better manage your spending, even when you’re not handing over cash for them.
3. Shop with lists
Have you ever walked into a superstore for bread and milk, only to come out with an assortment of purchases and a $100 credit card charge to boot? It’s easy to get thrown off course when there are “sale” signs everywhere smacking you in the face, or needless electronics strategically positioned at the front of the dairy aisle. When you have a credit card on hand, all you need to do is swipe or insert it, and voila -- those extra items can be yours.
Instead, create a shopping list each time you head to the stores, and force yourself to stick to it. While having a list won’t entirely prevent you from straying, you’re less likely to overspend if you have clear instructions written out for yourself.
Another option is to reward yourself for sticking to your lists so you’re more likely to do it. For example, you might decide that for every month in which you don’t stray from your lists, you get to make a modest purchase (emphasis on modest, since you don’t want that one treat to wipe out the money you saved by being disciplined).
4. Wait 24 hours before completing non-standard or impulse purchases
Many of us regularly fall victim to impulse purchases, whether they happen in stores or online. Credit cards make it extra easy to complete those unplanned purchases, because if you’re out and you don’t have the cash to pay for one, you can charge it and call it a day.
A good way to avoid impulse buys, however, is to institute a 24-hour rule: The next time you’re tempted to buy something out of the blue, force yourself to wait 24 hours before going through with it. During that time, you might come to your senses and realize that you can live without the item in question, or that it’s not worth the cost.
5. Don't store your credit cards on your favorite retail sites
Many of us shop online for convenience and as a form of entertainment. After all, when you’re sitting on an hour-long train ride on the way home from work, a little window shopping on your phone is a good way to pass the time. A good way to avoid making purchases at a time when you’re just supposed to be browsing, however, is to not store your credit card information on the sites you tend to frequent.
When you have that information already stored, completing purchases is generally a matter of clicking a button. Reaching into your wallet to dig out your credit card, however, is a much more cumbersome process when you’re in a public place, and that extra step might thwart you from going through with it. The same holds true if you’re curled up all nice and cozy on the couch, and your wallet is in another room. Your chances of getting up from that comfortable position are somewhat slim, thereby saving you from a purchase you otherwise would’ve made.
Benefit from your credit cards, but be careful
When used correctly, credit cards can be a credit score booster and a good way to snag free money, miles, or other incentives for buying the things you need. Just don’t cross the line into overspending, because once that happens, it’s often hard to undo the damage. If you really can’t trust yourself to not abuse your credit cards, store them in a safe place and only use them when cash isn’t an option. You’re better off forgoing reward points than racking up a series of balances you’ll end up carrying around for years.