The use of credit cards has grown steadily over the past few decades. More people are opting to pay for purchases with plastic over cash. And with online shopping credit cards have become the payment method of choice for most consumers.
When the bill comes due though, people vary in how they deal with it. People tend to use credit cards in 3 ways:
- For everyday purchases, then pay balance in full each month
- One-time life events charge up a balance in one transaction
- Lifestyle debt charged up over time
I’ll discuss each of these categories one at a time.
First, there are those who use credit cards mostly for convenience as part of their financial strategy. These are the folks who use plastic for gas, grocery stores, restaurant meals and other everyday purchases, then pay off the balance in full each month when it comes due. They typically set a spending limit for themselves, which is most likely lower than the actual limit of the card, and don’t go over that for the month. They have the self control to use only their own personal limit, which is set in advance and is based on their monthly budget. They may splurge once in a while, but impulse purchases are the exception rather than the rule and are paid for with savings. These types of users will benefit from rewards cards, which offer financial perks but typically have higher interest rates than other credit cards.
Next there are those who have an unexpected event occur in their lives and charge it to the credit card. They most likely don’t already have an emergency fund to draw on when the unexpected happens. Events such as car accidents, medical bills, or the birth of a child fall into this category. This debt isn’t lifestyle debt, which occurs as a result of living above your means. Rather, a lack of advance savings is usually to blame.
Finally there are those who live beyond their means on a regular basis. They spend what they earn and then some. People in this group may see a leather recliner while out shopping that would look perfect in the living room corner. They may decide to purchase a new $800 laptop with no money saved up. Or they may buy some expensive jewelry for their significant other. They won’t think twice about charging it to the credit card. When the bill comes they may even be afraid to go to the mailbox to see what’s waiting for them.
For those in the last group, a lack of self-control is usually to blame for their spending habits. Incurring debt for optional expenses is never a good idea. Plan for these items instead by setting up an automatic transfer into a saving account each month until you reach your goal. This allows you to avoid paying the high interest rates that come with credit cards. If you begin to pay down the balances on your credit cards but still feel the temptation, it’s best to cut up the cards and use cash only. It may be more inconvenient, but it will save you from crushing levels of debt later on.
In my opinion, only those who pay off the balance in full each month benefit from using credit cards as part of their strategy. To cover the cost of unexpected expenses build up an emergency fund to get you through. And for optional purchases, the best strategy is to save up first.