In the third quarter of 2013, total household indebtedness in the U.S. rose to an astonishing $11.28 trillion dollars, up 1.1 percent from the previous quarter. And, according to government data and Federal Reserve statistics, $4 billion of that increase can be attributed solely to credit card debt. So, what does this tell us? It says that we have a problem. It says that American families are turning to credit to fill the gaps in their monthly budget. And unfortunately, it says they're not paying their balance in full each month like they're supposed to. No, they're making payments, maybe even the minimum, and letting their balances grow. And that's why, according to the Federal Reserve, American consumers currently carry a collective $672 billion dollars in credit card debt as of the end of this year. It's simply gotten out of hand. But it doesn't have to be that way.
The truth it, credit cards get a bad rap. Because a certain segment of the population uses them irresponsibly, it's often assumed that they're unsafe. Even personal finance guru Dave Ramsey makes no exceptions to his anti-credit card stance. "There is no positive side to credit card use," says Ramsey on his website. "You will spend more if you use credit cards."
But, is that the truth? Many who use credit responsibly would disagree. In fact, plenty of credit card users pay off their balance in full every single month without ever carrying a balance. Others use a travel credit card or cash back rewards card in order to reap significant benefits. Then, there's a third wave of people who have mastered the use of credit cards for their benefit. The elite group actually uses their credit cards as a budgeting tool that keeps them on track. Confused how that can happen? Here's how.
Credit vs. cash
Think about it. If you're using cash for your monthly budget, you've got to come up with a creative way to keep track of it all. You might start by keeping receipts or tallying your expenditures in a little notebook. But, what happens when you lose a receipt? Or, when you don't write down what you've spent? As the month progresses, you might find it difficult to account for all of your individual purchases. So, do you keep an ongoing list of what you've spent and where? And, are you able to keep track of what your spouse or significant other spends as well?
On the other hand, credit cards can truly be a budgeting dream if used correctly. You don't have to keep receipts nor do you have to write anything down. All you have to do is choose a credit card that offers online account access and check in every few days. Get an additional card for your spouse or significant other as well, and you'll never have to hound them for receipts. All of your purchases will be listed neatly in your account activity and you can use that information to track what you've spent in each budget category as well as how much you have left.
Making a credit card budget work
Of course, using credit cards for budgeting purposes can backfire if you don't know what you're doing. In order to make this strategy work, you have to possess a certain level of self-control and discipline that not everyone has. Here are some additional tips for using credit cards as a budgeting tool.
- Set limits in order to stay on track. So, your grocery budget is $300 this month. Once you set limits, use your online account to make sure that you don't spend a penny more than your limit. Doing so will keep you accountable for the budget you've set and teach you to spend within your preset budget allotment.
- Pay your balance in full every month. You can even pay it several times per month if it suits you. Find out what works best for you and pay off every nickel you charge. Paying your account off will serve as a reminder that it's real money that you're dealing with and keep you on budget.
- Check in frequently. Forgetting to check in on your spending is one of the quickest and easiest ways to get completely off track. Instead, check in on your account every few days. This strategy helps you see what you've spent and where, and can assist you in keeping your spending on track for the remainder of the month.
Credit cards do get a bad rap, but they can actually be used in a way that is beneficial for your financial situation if you know what you're doing. Instead of getting into debt, use your credit card as a budgeting tool and pay it off every month, and in full. And if you're up for it, switch to a cash back rewards card or travel credit card so that you'll be rewarded for your outstanding credit card behavior.