“I budget very carefully. I use my credit card all the time.” It’s not often that you hear such a remark because traditionally the constant use of a credit card is held up as an example of bad money management. But a surprising number of households that budget carefully use their credit cards a lot. Here’s how it works.
Why Credit Cards Make Sense
First, using credit cards responsibly boosts your credit rating, which is important if you need to take out a significant loan in the future.
Second, lots of cards come with rewards. Typically these will be cash back or travel miles, but there are often other extras, like free warranties or free travel insurance.
Third, credit cards can help you to set and to maintain a budget.
Using a Credit Card to Set a Budget
The first steps when making a budget are to write down how much money comes in and to identify where it goes out. The first, for the majority of people with just one source of income, is straightforward enough. It is with the second task that the credit card comes into its own.
With a credit card, you are creating an automatic record of where your money goes. Using your card for all your spending means that almost every cent is accounted for. All you need to do is to go through your recent statements and analyze what went where.
Some credit cards will sort your spending into categories for you, or you may want to get a different card for each area of spending. Look at an advice site to see what is available before you apply.
Using a Credit Card to Manage a Budget
With online accounts, it is easy to keep tabs on your spending. You could do this each month, but it is probably more effective to do it every week. Then you will know early in the month if you are overspending and need to rein back, or underspending and able to relax a little; and with fewer items to analyze it is easier to assess the spending in each category, which should help you to tweak your budget if needed.
If you and your partner run your household expenses together, you can use two cards on one account and you can each see what the other has spent, showing you where you need to control your own spending in a particular area.
Your budget should include money set aside for bigger occasional payments—a credit card can only help to spread the load temporarily. Remember too that all these only works if you are paying off the balance in full every month—otherwise you need a new budget category to pay the interest.
Credit Cards Defy Their Reputation
Credit cards in irresponsible hands can be a recipe for runaway debt. But for a careful family, they can be a useful tool to manage money accurately, as well as bringing in those little extra rewards.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.