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A lot of people will tell you to ditch the credit cards. You can use credit cards responsibly, and I’m going to teach you how.
When it comes to budgeting, you’ll hear a lot of people say to ditch the credit cards. It’s the cards’ fault that you’re in debt. The simple truth is that credit cards do have a place when it comes to building your credit. When you use credit cards responsibly, they could be perfect for you.
I used to be like so many others. The credit card was there for when I didn’t have the cash. I’d put it on card and pay it off later. I did end up in a lot of debt that required payday loans online to get out of. After that, I switched the way I thought about credit cards.
I now use credit cards to help with cash flow. Despite the large limit I have on them, I never go over 30%. In fact, I don’t go over 8% across the two credit cards I have. The limit is just there if there’s a huge emergency. Here’s how I did it.
Make a plan to use credit cards responsibly
The first thing to do is make a plan. You need to look at your budget* and know just how much money you have coming in each month.
I use my cards for cash flow. Except for a few purchases that are directly taken out of my accounts like my rent and hydro bill, everything goes on my credit card. All food and drink items go on one card, while other purchases go on the other. I like to split them up for the essentials and the non-essentials.
I have a budget for the amount I’m allowed to spend each month. I take off all the necessary payments from the budgets and then what’s left over is what I’m allowed to spend on my own items. If I’ve saved for furniture or a vacation, I’ll add that amount in to the credit card balance and then use the savings to pay off the amount later.
Doing it this way helps me due to the uncertainty of when I’ll be paid because I’m a freelancer. It also helps me budget because I save first and then use the money.
Clear off the credit cards completely
When each statement comes through, I clear off the entire payment. I don’t do minimum payments. That usually doesn’t even cover the interest that is going on a card! I want to avoid any interest being paid. Depending on when the statements come through, I may have already paid some of the card off for cash flow needs so I have just a little amount left over that I didn’t predict.
It’s important to clear the credit cards completely. If you leave just a cent on the card, you’ll have to pay interest. Your purchases will cost you more, and the interest rates are ridiculous right now. Why give the banks free money?
The interest rate is always going to be higher than your savings interest rates. Don’t think you’ll make more by saving. Clear the credit cards.
Plus, clearing everything off is great for your credit rating. You show lenders that you are responsible with your money. You show that you only spend the money you have available, and lenders are more likely to give you other money you may need, such as a mortgage.
Keep the balance low
When you make your plan, you’ll know the budget you have available on your credit cards. That doesn’t mean you have to spend that whole amount. When you use credit cards responsibly, you also look at the utilization percentage.
This is the amount you use compared to your credit limit. You want to keep this below 30% to protect your credit rating.
So, if you have a $1,000 credit limit, you’ll only want to put $300 on it at one time. At least, that’s what you’ll want there for the statement date. If you put $1000 on it at the start of the statement cycle and pay all but $300 off by the time of the statement, you’re still at 30%. Make sure you clear it, though!
You want the credit utilization across all cards to remain under 30%. Let’s say you have a second credit card with a $5000 limit. You now have two cards with $6000 available. That means your 30% is $1,800.
So, even if you have a budget of $3000 for your credit card expenditures, you’ll want to keep the balances down to $1,800.
I personally don’t like seeing my utilization percentage go above 10%. I’m just nervous after being in debt and going above 10% sets off my anxiety. That’s a personal thing, though.
Keeping the credit utilization down is great for your credit rating. It shows you’re sensible with your money.
Do you use credit cards responsibly? Is this something you’re learning how to do? Share your thoughts in the comments below.