Using Credit Cards for Money Management

When they are used improperly, credit cards can encourage frivolous spending. The ability to "buy now, pay later" has led many individuals to financial ruin when they find that they have overspent their ability to pay. High interest rates and low monthly payments lead to credit card balances that can spiral out of control, until the credit card holder is forced to pay much, much more than the value of the original purchases. Unmanageable credit card debt can lead to grave financial difficulty, and even to bankruptcy. As a result, using credit cards for daily purchases and recreational shopping has become something of a taboo among much of the population.

Are Credit Cards Useful?
Despite these warnings, credit cards are only as dangerous as the people who use them. Many people use credit cards for small purchases, such as gasoline, and are diligent in paying off the balance each month. This practice can help build a good credit rating, demonstrating the cardholder's ability to use credit wisely and pay it back on time. With a good credit rating thus earned, individuals are more likely to get good deals on loans when they need credit for large purchases such as houses and cars. Even for people who do not have any interest in developing their credit rating, however, there are good uses for credit cards.

Credit Cards for Money Management
Although it may seem counterintuitive, with a little reinterpretation, credit cards can be a powerful money management tool. For individuals who use their bank accounts for important monthly bills such as rent or mortgage payments, utilities, and monthly dues, as well as for daily purchases and discretionary spending, credit accounts can be a useful way to separate all these different expenditures. There are many ways to keep track of and categorize expenses, including the use of computer programs and paper ledgers. These methods are too time-consuming for many people, however. If used properly, credit accounts might be a good alternative.

An Example
Consider this example. You have two checking accounts and a credit account. The first checking account (account A) is used for automatic withdrawal expenses: your cell phone bill, car insurance, gym membership, and so on. The second account (account B) is used for other expenses like groceries, clothes, gas, and entertainment. You don't use the credit account much because you want to avoid falling into the trap of too much debt. Although the credit account is set up as overdraft protection for your checking accounts, you keep it for emergencies only. Although this is a fairly good system, and one that ought to remain stable and reliable for some time, you could be putting that credit account to better use.

Where Does the Money Go?
Suppose, in the example above, that you have no desire to buy a house or a car any time in the near future. Maybe you even have enough saved up that you could put a down payment on a car or a house at any time, so you're confident in your ability to get a decent line of credit if you should change your mind, and maybe your credit rating is already first-rate. So, building credit isn't a concern for you. What should be a concern is keeping track of how much you spend on various items. The car insurance and cell phone bill are necessary expenditures, but where does all the money from account B end up? You can use the credit card as one fast and easy way to find out.

Avoid the Hassle of Bookkeeping Software
Try using your credit card to pay for anything you consider a discretionary expenditure. This could include going to the movies, buying new clothes, eating out, or purchasing any of the other things that you don't absolutely need, but that make your life more enjoyable. Of course, it goes without saying that you will need to be careful not to spend more than you can afford. At the end of the month, when you receive your bill, you will need to be able to pay the balance without incurring interest fees. By doing so, you'll be able to see quickly and easily how much money you spent that month on fun. Because the credit card company will keep track of your purchases and your balance, you won't need to fuss with bookkeeping software.

Use Credit Cards Carefully!
Of course, for serious record keeping, this method is not advisable, but if you would like to keep your frivolous purchases in check, the credit card could be one solution. You'll be able to see how much the balance varies from month to month, and make a conscious effort to use your credit card less in future months if you need to. And if you're still worried about going into debt, try reversing the scenario: use your checking account for frivolous purchases and the credit card for necessary purchases. That way, you know you aren't using credit on things you can't afford. As long as you maintain enough money in the checking account to pay your credit card off at the end of each month, you will be safe, and you could learn something about your spending habits.