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Cory is a young man who wants to do the right thing. He’s been making smart financial choices, and he wants to continue to do so. But he’s worried that using his credit card is too easy. He’s come to ask GRS readers for help:
I’m 21. For three years, I’ve had a debit card and loved it. No more borrowing my parents’ credit card to make purchases! I can use it anywhere, just like a credit card. I have a pretty good memory, and almost always know exactly how much money is in my checking account, usually within a dollar. If I make a purchase, I automatically update my account total in my head, and whenever I actually check my account balance, I’m never shocked at what I see.
A couple of months ago, I decided to get a credit card and start building good credit. I’ve paid the bill diligently each month, but since I’m using credit, and not taking money out of an account, I just can’t seem to keep track of how much money I have vs. how much I’ve charged on the card. Each time I make a payment, it feels like I’m giving up more money than I should be, because all month long I’ve been thinking that the money I actually have is the money that’s in my account, not considering what I’ve charged on the card.
I know this is just a psychological thing, but I was wondering if your readers had any tips on how to help? I feel like I’m spending somebody else’s money until that bill comes, and I’d rather feel like I’m spending my own.
This actually causes me problems, too. One reason I got into trouble when I was younger was the lack of immediate feedback about how much had been charged to my credit cards. The spending was invisible and painless. It felt like free money. (Financial guru Dave Ramsey likes to say that when you pay cash, you can “feel” the money leaving you.)
Since I returned to the world of credit last year, I’ve been diligent about practicing good spending habits. I do everything a responsible credit card user should. All the same, I don’t always know my current balance, which was something I did know when I only used a debit card.
If Cory wants to feel more in control of his credit spending, he might consider the following:
- Check your balances often. Almost daily, I visit my accounts online. This not only helps me keep tabs on my spending (and earning), but it also helps me stay vigilant for possible fraud and identity theft.
- Use money management software. Last year, I shared a simple trick for tracking credit card expenses in Quicken. When I process my receipts every weekend, I create a placeholder transaction that shows I’ve already paid my credit card expenses. (Click that link for more info.) This helps me with my mental accounting.
- Set cash aside immediately. Both ING Direct and my credit union allow me to have multiple subaccounts. If I didn’t already do the Quicken trick, I might consider moving cash from my checking account to a designated savings account whenever I used the credit card. This would prevent me from spending money I didn’t have and get it ready for me to pay the bill.
- Pay for large expenses with the credit card, but use the debit card for everything else. It’s easier to remember a few big expenses than a bunch of small ones. If your want to keep the numbers straight in your head, only use your credit card for major purchases.
What about you? Does spending with a debit card feel different to you than spending with a credit card? Do you ever worry that you spend more than when you use cash? Do you have any tricks for keeping track of how much you’ve spent? What advice can you offer to Cory?
This article is about Ask the Readers, Credit Cards, Psychology Friday, 22nd August 2008 (by J.D. Roth)
August 22nd, 2008 at 5:35 am
I not only check my credit card balance on line frequently but I actually pay it every week. I do financial stuff while my kids are napping on Fridays. I pay bills, update the budget etc. At that point, I check my credit card balance and pay it every week. That way I not only know what is on there but it is paid off right away. Less of a lag time and it is harder for me to conveniently forget what I charged.
August 22nd, 2008 at 5:37 am
I would like to commend Cory on recognizing that he needs to build a credit history, and at the same time wanting to remain responsible with his finances.
JD had 2 very important points–use financial software and check your balances often. It is very important to be financially organized, and using a software program such as Quicken will not only help you in that regard but with the wealth of reports that can be run, you can have many different looks at your financial situation at any given time.
One thing that Cory may also do is to contact the credit card issuer and have them set the limit at a level he feel comfortable with. There is nothing wrong with having a credit limit of only $500 when you are just starting out in order to get used to the new idea of using credit.
Also, and this may be a little extreme, but not carrying the credit card in his wallet may also help deter unnecessary spending in the beginning stages. Just grab it when you know that you are going out for a specific purpose, and only use it for that intention.
August 22nd, 2008 at 5:40 am
My trick is to go home and pay the credit card the amount I just charged to it before I get the bill. I use online banking, so it’s easy. My cc is also through my bank, so it shows up on my banking profile, and it’s easy to keep track. I use my credit card for online purchases, rarely in store. BUT….if you’re having a hard time tracking expenses with a credit card, DON’T USE IT OFTEN!!!! It’s too easy to get into trouble!
August 22nd, 2008 at 5:42 am
I no longer use credit cards, but when I did I used a trick my Mom taught me.
First, you should be keeping an updated checkbook register to track your debit card and check spending. I’ll assume you know how to do that.
(I’m regularly surprised by the number of people who have NEVER used a register — paper or electronic!)
Second, write your credit card spending in your checkbook register. Every time I purchased something with a credit card, I would write “DRAFT” in the code box, then of course the date, a description, and the amount.
Keeping track of each expense encouraged me to treat it like cash leaving my bank account in real time. If I had $100 in the bank, and spent $10 on my credit card, it would appear that I now had $90 in the bank (according to my register). This helped to prevent me from spending more than I could afford to pay in full at the end of the month.
Third, when it’s time to pay your credit card bill, “balance” your Drafts against the credit card statement. Make sure every item listed on your statement is also written in your register, and check off each item the way you check off the items on your bank statement.
Fourth, add to your register any items that you forgot to add the first time around (hopefully none).
Fifth, write a check (or pay online) for the total due to the credit card company. Because you have been writing out the payments as you made the purchases, you need to write that total amount TWICE — once OUT (to account for your payment), and once IN (so that you don’t appear to have double-paid). Of course, the second “IN” amount can be checked off, since it will not appear on your bank statement later. But by having the total OUT amount in your register, you will be able to compare this against your bank statement the following month.
It’s certainly a process, but once you’re used to using a register for everything, it truly simplifies your life. Registers are especially important as your life gets “bigger” and you have more expenses.
You can do the same thing with electronic software, too, of course.
August 22nd, 2008 at 5:52 am
I use my credit card for online things only. I don’t buy a lot of stuff online– it’s mostly plane tickets and Giant Microbes– so my bill never gets huge. I pay it when it comes. I don’t need to check the balance because I know before I buy something that the money is there.
It seems like the question is how to use a credit card regularly without using it crazily. Why not declare one class of reasonable expenses credit-card-able? If groceries are a stable expense, use the card for that and nothing else. Or gas, or something that you have to buy anyway. Then it’s not magical free money but another flavor of debit card, one with a slightly longer lag time.
August 22nd, 2008 at 6:04 am
Although I’ve always paid my credit card bills in full every month, when I was younger I did have to borrow money from my parents to do that a few times.
What really helped me out was using a money management program (MS Word), daily inputting my receipts. I could see very frequently where I stood in terms of money.
Not only did this make sure I never spent more than I earned, it had some side benefits as well: It became a game and fun to see how high I could get my accounts. Even though I was only making an hourly wage slightly above the minimum, I was able to save for a new guitar and amplifier (well, from Ebay, but still expensive items), and still meet all my bills and eating (and partying) needs.
I was about the same age as Cory (20 actually, when I started).
The game became so fun that I continued it even when I got a better job at 20k per year. And then 30. And then 40. After a while, I had 60k in the bank to use as a down payment on a home before my income improved significantly after finishing grad school this year (I even left some to the side as emergency fund and buying things we needed for the house), after I spent 13k on getting a loved one out of debt.
Incredible. And I give a LOT of credit to daily inputting my receipts into a money management program (My parents get a lot of credit too).
August 22nd, 2008 at 6:04 am
As long as Cory realizes that credit cards are a trap, and maintains a healthy fear of using them, he will be doing much better than I did at his age.
This has already been pointed out, but the only way to keep ahead of it is to track every purchase the same way he should be with a debit card. Treat it like cash and pay it immediately.
Save up cash ahead of time for the big purchases, pay with the credit card for the insurance benefits that the cc companies provide, then pay it off immediately.
Always hold some fear and dread of being in debt. Otherwise, that is what you WILL feel every month trying to pay your bills if you get carried away with the plastic.
I have about $10k left of a $40k cc debt. Thanks to JD, those who comment, and Dave Ramsey for giving me hope and instruction. I will be debt free early next year.
August 22nd, 2008 at 6:10 am
You do not have to use a credit card to build credit. This may not be the method for you. Consider a secured CC, having the utilities in your name and then in turn paying them ON TIME, a car loan………
Explore your options! A little research on what actually makes up a credit score may be enlightening!
August 22nd, 2008 at 6:10 am
Use an envelope budgeting system like Mvelopes (now Finicity) or Crown’s Money Map software. It automatically sets the money “aside” for you as you record the transactions.
I also caution against spending based on “what’s in your account” as he describes how he uses his debit card. Maybe he doesn’t have much in the way of bills such as large periodic insurance premiums, annual car registration, but surely he has rent. You can’t spend based on “what’s in the account.” You have to budget to ensure the money is there when the bill comes due. No matter what means you use to pay for your stuff, you need a budget.
August 22nd, 2008 at 6:15 am
I’m with bRobert… I wasn’t afraid enough of what credit cards can do to you, and it caused big problems for me later on.
Make sure you don’t fall into the trap of spending money you haven’t received yet. I was always spending a month into the future, which was fine when I was employed. When I lost my job, though, I had a month’s worth of expenses on my credit card and no way to pay for them. You HAVE to treat your CC like a debit card, or you will dig yourself into that same hole.
August 22nd, 2008 at 6:15 am
Never wait for the payment due date, is my tip! I find that the longer I let the time go between making a purchase and actually paying cash money for it, the more I am likely to spend. I generally pay off my credit card weekly. I did also keep my cards in my desk drawer except when I needed them for specific purposes for several months, which helped break me of the habit of reaching for them for every little purchase.
I think different things work for different people; registers are great for some, but I find writing things down to be too fiddly, for example. You have to find some way to make yourself pay attention to what you’re doing with your credit cards, but the attention-getter that works for someone else may not work for you.
August 22nd, 2008 at 6:17 am
I agree that the way to go is to enter all of your charges in financial software each day or two. On Microsoft Money, the “Account List” will show you all of the accounts and the net balance, making it easy to see what you’ve spent vs. cash on hand. I also agree that it’s important to check the accounts online frequently to watch for errors or fraud - I use mint.com to make it easier, rather than having to log into each one individually.
As far as whether using a credit card makes me spend more, I don’t believe it does. I pay them each month, pay no fees, and get rewards cash regularly. I was annoyed when Michele Singletary wrote her column in the Washington Post claiming that it is stupid to use credit cards even if you get cash rewards and never pay any fees or interest. Her point seemed to be that her readers aren’t smart enough to figure out on their own whether using a credit card causes them to spend more.
August 22nd, 2008 at 6:19 am
If you’re worried about losing control, keep a separate high-interest savings account stacked with cash equal to your credit limit. This way if you ever go on a binge, you’re at least doing it with savings.
August 22nd, 2008 at 6:24 am
Using a debit card is a good idea but keep in mind that every time you do so you are exposing your PIN number to networks that are often not secure. There have been cases of even large retailers (Target I think) having systems that leave your PIN vunerable at some point during the transaction.
Just something to think about.
August 22nd, 2008 at 6:26 am
We put everything possible on our card for the airline miles, and pay it off at the end of the month.
We did get into trouble last year, though, because we had some major expenses and no emergency fund. Lesson learned. We have savings now.
“Does spending with a debit card feel different to you than spending with a credit card?”
Yes, because I’m thinking about the airline miles we could be getting! I almost have two tickets to Europe, which cost about $2500 the last time we went.
“Do you ever worry that you spend more than when you use cash?”
I used to do that. The out-of-sight, out-of-mind thing got me a few times, then I’d have to work to pay it all off the next month. Since paying off all of our credit cards, though, I’m super cautious about expenses, check the balance every few days, and evaluate my purchases rather than impulse-buying.
“Do you have any tricks for keeping track of how much you’ve spent?”
I check the balance online, and I check it often. My advice to Cory would be to do what I plan to start doing–pay the credit card every week or every few days, rather than waiting for the bill.
I get what he means about borrowing money. We have no credit card debt now, but it still sort of feels like we do when there’s a month’s worth of expenses on our card, even though we know we aren’t paying interest, and we’ll pay the balance in full. I think if I start paying it every few days, it would feel less like we’re somehow “behind.”
August 22nd, 2008 at 6:53 am
The problem isn’t the credit cards its the spending. I can certainly understand how credit cards make it easier to spend. But every time you buy something you have to ask yourself if you really need it.
Also stay out of stores. The best thing I ever did was move to the city. There are no “big box” retailers around me. I have to drive 15 minutes or more in heavy traffic to get to one. So usually I’m not willing to do that unless I really need something. Stay out of stores and when you do have to buy something (even something like groceries) look inside your cart before you check out and ask yourself “do I really need this?” Until you can control your buying you will not have control over your financial life regardless of the form of money you use.
August 22nd, 2008 at 7:06 am
I like the idea of the “float” on my credit card purchases — for some reason it gives me a little thrill to wear something before I’ve paid for it — so I’m definitely not in the pay your cc bill every week group. Instead, I keep my receipts in a separate notebook for each card I use (two cc’s and two department store cards), with a running total for myself to check against the bill, even though I pay the complete bill every time.
I do agree with the idea of not using a card much though; unlike people who put everything on a card, I have a mental minimum or category of spending for each card, which might be large purchases that I’m not carrying cash for, or only certain categories (like prescriptions, for example) that I want to have an extra record of spending.
August 22nd, 2008 at 7:06 am
Here is a really low tech trick based on the check register idea but its more portable.
Take a piece of cardstock and cut it to credit card size. Keep it in your wallet behind the card. Everytime you make a purchase, write it down so you have a running total. When you pay it off, zero it out and start again.
Best of luck keeping out of debt!
August 22nd, 2008 at 7:11 am
My credit card spending decreased when I started going over each bill in detail and rating how much enjoyment I got from each purchase. (Yes, this is similar to Your Money or Your Life’s method of rating all purchases - which I was also doing - but I kept doing it on CC purchases after I got slacked on tracking cash.)
Since getting married, we go over the credit card bill together. Which means that if it isn’t something we BOTH think is worthwhile, I generally don’t buy it.
Oh, and no, I don’t carry a balance.
August 22nd, 2008 at 7:13 am
My advice to Cory: if you can already keep track of your account balances in your head (good for you), simply subtract the credit card items the same way you would subtract the debit card items. True, your mental balance might not match the balance actually in your account, but if your mental balance has always been accurate, then trust that. Keep subtracting the amounts from purchases as you buy them, and then just keep the total level when you take out the money from the account to pay the credit card. At that point, the total in your “real” account will match the total in your “mental” account.
August 22nd, 2008 at 7:14 am
If you are obtaining a credit card only for building credit, than only put 1-2 transactions on it per month. This way the bill is not large and you will still be building a credit history.
August 22nd, 2008 at 7:16 am
I personally treat my cc as another account like I would my checking or savings account. when I make purchases I mark them down in the software (buxfer.com currently) and check the cc site weekly to balance. I then pay the cc off at the end of the month.
I make all my purchases and pay bills with my cc since I can take that money and put it in a savings account to earn a little interest. this doesn’t count for much with each purchase, but overtime pennies add up (GRS anyone?). This only works if you pay the cc off completely each month. this will also earn you reward points for cheaper flights if you like to travel or whatever.
I think it is very important to treat your cc as a negative balance account. Start at 0 and each time you make a purchase bring the balance into the negative so when you look at it you know how much you owe, and not necessarily how much is left on the cc.
If you use something like buxfer.com you will then get an accurate overall balance since it will take the negative cc balance and your positive savings and checking balances and put them together for a lower overall balance.
August 22nd, 2008 at 7:19 am
I’ve done a few things differently since getting out of college about 7/8 months ago and actually having money. As mentioned above I’ve done some of the following:
-Set up ING Direct and paying into savings first every 15th/End-of-month $100 each. Adding extra money if I have it.
-I’ve been using Mint.com to track my expenses so I can check from work/home/etc to see my Debt.vs.Cash and where my money is.
-I just started this trick as well, using cards is more convenient for me (might be bad) but I put my debit card in front of my CC in my wallet. Using it for majority of my purchases and have to try for the CC if I must.
-Automate bills (Cable/wireless/etc) to my CC (where possible) so I know about how much the CC will be each month. Pay CC and large amounts manually so you are aware of them.
Just my tid bits
Good luck, I’m just getting started too at 23
August 22nd, 2008 at 7:20 am
You could write each credit card purchase into your checkbook register and “deduct” the money from your account balance. Save your receipts and do it every night, or do it once a week, whatever feels right based on your spending patterns. Seeing it in writing is powerful, even if your memory is normally great. Double check against your online bank statement, so you can ground yourself by saying “OK, this says I have $500, but I need to ignore $100 of that because it will go to what I bought on credit.” Ideally, you would do this recording trick with debit purchases too, rather than relying on memory (there’s invariably going to be someone who holds onto a check for a long time before cashing it, and then you get a surprise, that kind of thing).
Do you have a budget? That might really be the first step, i.e. don’t just spend until you just reach the end of the money that’s in your account. If you have a budget/spending plan in mind, you could make a rule like you only charge your discretionary spending to the credit card, and then mentally deduct purchases until you hit the $200 limit or whatever yours happens to be for a month. This could help you get around constant balance checking. When you’re done, you’re done, and you have to stick to it.
August 22nd, 2008 at 7:23 am
Here is a trick: Lock your credit cards in a drawer.
I got a credit-card along w/ my first job out of college, and I found I wasn’t as careful about spending as when I used debit/cash. I quit using the card, and though I miss the bonuses, I know I spend less now than before.
Don’t get trapped into a credit card! Cash is the way to go!
August 22nd, 2008 at 7:23 am
I’m the exact opposite–I don’t like debit cards. Tracking my exact balance all the time would get irritating. I know I’m fine as long as I’m staying within my limits in each budget category for the month. I may not be able to rattle off exact numbers, but I always know my bill will be below X.
August 22nd, 2008 at 7:26 am
What a timely request for me! Just last night I was having a little bitty nervous breakdown because I realized I had too many credit cards.
After ahuling ourselves out of monstrous debt a few years ago we’ve still used them for as much as possible [hubby cannot handle cash and I like the tracking of expenses on it - no effort from me] but have religiously paid down the full balance each moneth without trouble.
But I only had two cards I really used all that time.
Of late all the great ‘offers’ have increased that manyfold - and to hboot some of my ‘get a cc to get the first purchase discount on a big purchase’ ccs have morphed from store ccs into regular visas - my toysrus car, my radio shack card etc - that I’d used only once now had a nondescript visa sittingin a drawer confusing me.
In the last two months of gotten a new gas card for a nearby station to take advantage of the 10% rebate on gas for our summer roadtrips, a chase freedom card to maximize rewards and get the $100 bonus, called discover to get a card on my long sleeping account to use for the higher reward on other gas stations . . . that’s a sampling
But I used to always track my spending on the nice chase website on whichever card I was using at the time - plus there was the amex for costco but I only used it THERE and it was easy to keep track of
Now I have too many sites and too many cards - so last night I made some calls and some decisions:
1. the random cards I didn’t even apply for got cancelled - and citibank affirmed my general aversion to doing business with them [they took over my radio shack card] by being relentless instead of cooperative when I wanted to cancel a visa with them
2. I removed several other cards from my wallet and put them away
3. I will keep my chase freedom card for general purchase, the gas card just for gas at that shop, amex for ccostco and discover for other gas if I can use it - if that doesn’t work out I will NOT keep with me anymore
I feel calmer already - not being able to see all my purchases in one place was really frightening and made me feel terrifically out of control - we charge several thousand dollars worth of expenses each month - we don’t have any more than normal spread out among these cards thank goodness but it really was not a good feeling!
August 22nd, 2008 at 7:31 am
This seems to be a budgeting issue, rather than a credit card issue. The change from debit to credit card didn’t cause the problem - it merely revealed the problem, which is that Cory does not have a clear spending plan. When he was using the debit card, the problem was not readily apparent, because “seeing” the money come out of his account created a psychological barrier to over-spending. Now that barrier is gone. My suggestion is to make a budget and track spending on a daily basis - keep track of where every penny is being spent (there are lots of programs and spreadsheets out there to help you with this - I use the old Pear budget excel spreadsheet). I think it’s great that Cory is trying to take charge of his financial life at such a young age. Best of luck to him.
August 22nd, 2008 at 7:34 am
I don’t have something special I do for CC - but this trick I use for bills that aren’t due for a long time might help.
I split my bills up by paycheck #1 of the month and paycheck #2. I plan to take $200 out of that #2 paycheck for the electric bill that I don’t even know the balance of till the 8th of the next month and I cant pay it early even though thats when I budgeted the money. So if I get paid on say, the 22nd - that can be like 16 days! That is a long time to have $200 “floating” in your checking.
So I went to the bank and opened a second checking account. When payday comes I transfer over all the bills that take a long time or are automatic withdrawls. This way I I can pay out from there knowing that there is only enough money for bills A, B, and C in there and if I tried to use it for anything else it would bounce.
Also, since this lets me pay all my bills at once - by about 3 days after our paychecks come I can see exactly what we have left for the next two weeks without seeing an inflated number due to what hasn’t processed yet.
August 22nd, 2008 at 7:38 am
I’m so glad that Chris decided to address this issue before it got out of hand. If he can keep himself aware of how much he has spent using his credit card, he will never have trouble paying the bill when (or before)it is due.
It’s interesting that he said that he feels like he’s spending somebody else’s money until that bill comes. To me, it feels like I’m spending ahead of my income, which is not a good feeling. So for me, this acts as a brake against using a credit card rather than a debit card.
Psychologically, my problem with using credit cards is that I feel like I’m paying for things twice. I use Quicken to track all my accounts, so a tank of gas may show in the reports as an expense this month, then again as a transfer next month when I pay the bill.
I once had some stickers on the front of my credit cards that said “CAUTION - Overuse may be hazardous to your wealth.!”. This really helped cut down on impulsive spending.
August 22nd, 2008 at 7:42 am
There’s a flipside to the psychology of debit card vs. credit card that Cory describes. I used to make everyday purchases with my debit card, figuring that I was spending money I already had in the bank. Trouble was, I ended up spending MORE, because I knew there was money in that account and therefore I gave myself permission to spend it.
A financial advisor suggested I try switching to a credit card for everyday purchases like food and gas in order to track how much I was spending. This has worked for me because I see the sum total of what I’ve spent in a month go UP, and as that number rises I tend to curb my spending, knowing that I will have to pay off that balance at the end of the month (I never allow myself to carry a balance into the next month).
Checking my credit card balance online and/or signing up for a weekly email update of the balance helps me stay aware of what I’ve spent. And if you’re disciplined about paying off the balance each month, you can build rewards points with the credit card company — I routinely cash in my points for gift cards that I use to buy clothing, for example.
August 22nd, 2008 at 7:47 am
Chase has the option of having a text message sent with your balance. I used it to help motivate me out of credit card debt.
August 22nd, 2008 at 8:08 am
We use our credit card for almost every purchase. We also pay the balance in full on or before the due date.
Our situation is different,but not uncommon, since I get paid irregularly in large sums. I deposit what I receive into a “high” yield account, and budget out what I would’ve gotten paid at the last (crumby) job I had. It’s akin to the “bank your bonus” theory.
It takes discipline, but I’m preaching to the choir.
I might also mention that I went stupid-crazy with CC’s at one point and ended up 30K in debt. My spouse did the same, but only to 20K
We took a hard-line and paid it all off in 2 years (2 years ahead of plan), and our household has been cc debt-free for 3 years.
It’s the *best* feeling in the world, though a bit anti-climactic when you make the last payment. Much like, “Oh, so this is what it feels like to not be silly anymore…”.
August 22nd, 2008 at 8:14 am
Could it be that Cory just feels some resistance to keeping up with his credit card spending in some way other than mentally? I used to resist doing this - I just hated the habit of recording receipts. But, the more complicated my financial life became, the more important it was for me to do the work of tracking my spending in some physical way. You will indeed feel like you’re spending your own money if you sit down weekly and record your credit card receipts, then subtract that from your available funds for the month. You can use fancy software, a check register, a piece of paper in your wallet, or a notebook that you carry for that purpose - whatever works for you - but you just gotta write it down!
August 22nd, 2008 at 8:15 am
Credit cards don’t have to be a bad thing. I could more accurately tell you what’s on our credit card before I could tell you what’s in the bank account. That’s why I don’t like debit cards - it’s too hard to keep track of when checks clear, paychecks hit, etc.
We actually use the credit card (two actually, one Amex Blue Cash and a Visa for places that don’t take Amex) as our budgeting tool. Each month, a set amount is budgeted for the card. These expenses include gas, dining out, groceries, prescriptions, fun, and any other spending. Every other day or so, I check the balance and make my entries into MS Money. We watch the amount and curtail spending if we get close to our budget. The card gets paid off in full each month, so it is treated just like any other account.
This works for us because I use MS Money to track *everything*. I project out what our bills and payments will be for at least a month in advance. Then, it’s easy to watch out for pitfalls and adjust accordingly well in advance. I handle the finances and keep my husband informed of the balances.
August 22nd, 2008 at 8:28 am
I initially paid off my Credit Card every time I used it. This was easy because it was through the same bank that my savings an d checking accounts were with and I could do it online.
I think paying it off daily removed any sense that the money wasn’t mine.
Now I pay it off monthly, but I still look at the balance 3-4 times a week and check that eveything is as I expect.
August 22nd, 2008 at 8:29 am
LOL! As a fresh-minted divorcee and in full bag-lady syndrome mode, I was so determined NOT to get a million bucks in debt ever again (no exaggeration) that on the rare occasions when I used a credit card, I immediately wrote a check in the amount of the charge and dropped it into a file folder. The amount of each check would be subtracted from the balance of my checking account. When the statement showed up, I’d drop a fistful of checks into the envelope and ship it to the credit-card issuer.
This worked to keep me from charging more than I had in my checking account. And…uhm…it’s probably where the sobriquet “funny” about money came from… My friends no doubt thought I was crazier than a loon.
Amazingly, I discovered I wasn’t the only person using that “method,” such as it was.
Since then I’ve smartened up a little. Now I have a money market checking account and a regular checking account. I charge EVERYTHING that is not paid with automatic electronic funds transfers; all groceries, gasoline, clothing, car care, repairman calls, hardware, gardening supplies and the like go on a cash-back American Express card. I budget $1,500 a month for these costs, and that amount resides in the money market checking account. With Quicken (or a similar program), all you have to do is enter the charges as they occur — or, as a practical matter, about once a week — and you can see at a glance how much you have left to spend. It’s then pretty easy to keep from “overdrawing” your credit-card account. This also allows you to “reconcile” your own records against the entries on the credit-card statement, an exercise that will head off all sorts of little surprises you might not have noticed otherwise.
I gild the lily, though, by keeping an Excel spreadsheet in which I divide the monthly $1500 credit-card budget into four parts to cover each of the (approximately) four weeks in a month. Then I subtract the charges for each “week” (some periods are a day or two more than 7 days) from the amount budgeted for each “week,” so I can see when I’m edging over the budget and get a grip before spending is out of control.
This scheme, BTW, requires you to hang on to credit card receipts until you can enter them in your books. You should keep receipts anyway, at least for a few weeks. I put them in a pocket in my wallet, affectionately known as “the bottomless pit of debt.” Don’t let a cashier put the receipt in the bag, ’cause you’re more likely to lose it that way.
August 22nd, 2008 at 8:34 am
Like many other readers I’ve (almost) completely stopped using a credit card. I use it only for work-related purchases (with exact reimbursement coming the bill is easy to track and pay) or for specific, single items (rare occasions). I got into the work purchases habit from my dad who kept one card for only work stuff to simplify submitting receipts for things.
August 22nd, 2008 at 8:36 am
To all of the people who tell Cory (as well as every other person that asks a similar question) that cash is the only way to live:
Please try to offer advice with relevant examples rather than simply saying that credit is bad, a trap, a scam, etc. If a cash-only life works for you, great! But that may not be the best lifetyle for everyone. Some may say that you are crazy for missing out on all of the benefits that a credit card provides, but they would be just as wrong for forcing their lifestyle choice on you. Young Cory is looking for practical and informative advice, and by trying to scare him away from credit is not necessarily going to help him. Everyone has their own preferences, and is free to share their experiences, but the best thing is to help him in his specific request, not turn this into another in a long line of anti-credit discussions.
August 22nd, 2008 at 8:47 am
We actually have a line item in our budget for how much we can spend on our credit card each month so we know we’ll have the money to pay it. We also limit our credit card expenditures to certain things, like dining out and entertainment purchases so that if we hit the limit for a month halfway through the month, it’s easier to just not spend on those things any more (you can’t just not buy groceries for the rest of the month, but you can stop eating out!). I track the amount of every receipt in an Excel spreadsheet, so it always shows at the bottom of the column how much money we can spend for the month on the credit card.
August 22nd, 2008 at 9:00 am
I don’t like my debit card, and so I never use it.
However, I use my credit card for EVERYTHING and pay it off every two weeks. I do have to pay attention to not let it be a license to spend.
What I did was I figured out how much I could afford to make as a payment every two weeks, and divided that amount equally by the number of days that span payments. That gives me a daily budget.
I can spend that amount daily, or I can “save budget” if I want to go do something like hit the bookstore.
I also factored into this a couple of regular big expenses, like my bus pass and a monthly massage. Also my grocery and gas budget. All these get taken off the top before I calculate my daily spending allowance on the card.
August 22nd, 2008 at 9:00 am
Cory is looking at the credit card like many people do in that he has a credit limit and he can spend up to that point. Don’t let the credit card company dictate how much you can spend. Psychologically change that so it is part of your overall budget. Set aside an amount each month, say $300, that you will not touch in your bank account and that will be your credit card payment amount. Then, rather than adding up the credit card purchases to keep track, subtract down. Thus you will keep track of how much you have left to spend just like your bank account.
Secondly, if the credit card is really just to build credit and life was easier with the debit card, don’t use the credit card for purchases. Stick with what works for you. Set up 1 or 2 bills to pay with the credit card that are fixed amounts each month and pay those as part of your budget. Then let the card collect dust in a drawer.
August 22nd, 2008 at 9:05 am
I use my credit card for gas purchases and major purchases. I pay off the credit card each month. If I do not have the money to pay off the card it is time to cut up the card.
I use my debit card for all other small purchases. I put the receipt for each debit transaction in my wallet so I will remember to log the debit expense in my check book. After I log the expense I throw away the receipt. The system works great and I don’t forget debit charges.
August 22nd, 2008 at 9:07 am
Two days after you use your credit card, pay the bill!!!
You don’t necessary have to wait 30 days later until the bill comes.
August 22nd, 2008 at 9:13 am
I feel like CCs are a slippery slope, well in my household it is. We’ll have huge cc debt, pay it off in full, and then once we start using our CCs again, we have huge debt. We can never get into that habit of using the card and paying in full. This past summer, we’ve used our debit cards only but with my husband back in school and colleges creating a monopoly on books, we had to resort to ccs again. It’s tough not having that cushion to fall back on when the funds run low. I really despise ccs! Once we pay off every single card, I am done with CCs.
August 22nd, 2008 at 9:16 am
If you spend your money on savings goals and big payments (house, rent, etc) first, I don’t think you spend more with a credit card. I have a budget and my wife and I don’t impulse buy. Every paycheck, we put money in ING and Credit Union subaccounts for Clothing, Medical, Vet, Auto, Gifts, Travel, Tithing expenses. After all those transfers, we have our daily spending on dining out, groceries, etc. We have no problem staying within our budget on those items. There just isn’t much left over after all of those transfers! Big purchases like clothes, baby expenses, etc already have a cap on how much we can spend (what we have in the subaccount).
My personal weakness is Dining Out. I don’t spend over our budgeted amount because my budgeted amount is so high. I’ll be the first to admit that if I got rid of dining out expenses, we could save more. It’s a constant struggle.
August 22nd, 2008 at 9:27 am
Using a credit card takes tremendous discipline, as Corey is seeing. I’ve always been financially savvy, yet there have been a couple times where I let the CCs ratchet up to 4-5000 or so. It happened so fast I was shocked. The same led me to pay them off ASAP, but ouch.
I would suggest Corey immerse himself in the Dave Ramsey no debt philosophy. The psychology behind credit cards is fascinating, and they can be a huge trap. It’s so freeing to use cash.
Personally, I now only use one CC for gas. Costco’s Amex gives a 3% discount on gas purchases, and since I am only buying gas, I am not at all tempted to throw an extra item in the cart because “it’s the CC”.
I use YNAB and I simply put the CC charge in the CC account AND enter it in the register as already paid. I put a little colored flag by the register entry to let me know I haven’t yet paid it.
Otherwise, I use CASH or a VISA debit card (same protection as a CC, but I have the $).
Clean, simple and no chance of racking up CC debt. Amazon is an easy place to spend $, but since I entered my VISA debit card as the billing agent, I think three/four/five times before I buy anything there.
It takes a very very disciplined person to use CCs wisely. I am an anally disciplined person, but it’s tough to beat the big credit boys at their game. So, I don’t try:)
August 22nd, 2008 at 9:31 am
not really sure if this is a “trick”.. but i have a credit card from my bank that is linked directly to my checking.. so they are together in my online banking.. it’s convenient because i can make payments whenever and as often as i’d like
more importantly.. i always know how much i’m spending and i always pay in full every month
August 22nd, 2008 at 9:32 am
we do something similar to Ann above. We keep a ledger as if we are writing a check. The amount we have budgeted for purchases goes on top, and charges on the credit card get deducted from that budgeted amount just as if it were our checking account. no more balance, no more purchases.
we do not carry balances; however, we are going to take advantage of the grace period to earn extra interest during that time. this coupled with the savings of using cc through cash back, and the cc purchase assurance features makes using a cc right for us.
August 22nd, 2008 at 9:44 am
This situation is lot like I do. I keep a real close eye on my debit card spending but a credit card is different. I would just not use the credit card for purchases at all. If it is something you NEED then you can make an exception. Using it to buy fast food and new toys ends up only getting you in trouble.
August 22nd, 2008 at 9:45 am
First off, credit cards are not inherently evil. Credit, like morphine, when used responsibly can result in significant benefits. And just like alcohol, some people are more predisposed to abuse. Lastly, the best system to track finances is one that is easiest to use. I recommend that you set up a Google spread sheet and create a form to input all of your expenses. In the form make sure you create a classification check box, this way at the end of each week you can use the spreadsheet to see what you are spending your money on. I believe JD had an article on how to create a form in google spreadsheets. The beauty of using google is that is allows you to have access to the spreadsheet anywhere you have internet. No pen or pencil necessary.
Lastly, debit cards are evil. Use cash instead. Because with a credit card company you can always call them and deny a charge, with a bank the money is already gone.
August 22nd, 2008 at 9:49 am
If you’ve got a card that will do it, set it up to text message or email you your new balance with every transaction.
August 22nd, 2008 at 9:53 am
How important is it to “build credit” anyway? If I had my finances completely in order, I think the only things I’d really need to borrow money for would be a house and a car. In addition, it’s probably a good idea to have one credit card for things like phone/internet purchases and travel.
If the purpose of a credit score is to determine the likelihood that a debtor will repay his debts, then I would think that (especially for somebody over age 25) somebody with zero credit history would be a great risk. That means they’ve gone 7 years and resisted the urge to ever sign up for a credit card. That shows me somebody who is managing his money well.
But if the purpose of a credit score is to determine how much interest and late fees a creditor can scam out of a debtor, then I could see where a credit score has value.
August 22nd, 2008 at 9:59 am
If your debit card has a Visa or Mastercard logo, you are provided the same protections as you would get with a credit card. The difference is, the money is gone from your account until the situation is resolved. But you will get your money back if Visa or MC agrees with your assertion.
August 22nd, 2008 at 10:03 am
I have a monthly budget. I sum the gas, groceries, entertainment, utilities and several other line items and pay that amount at the first of the month (I’m paid once per month) to my credit card…this causes a negative balance. I then use the card throughout the month until there is a zero balance. This allows me to build up points to purchase airline tickets and not carry a balance on my credit card. I also track all my expenses through MS Money.
August 22nd, 2008 at 10:05 am
Great comments so far, everybody.
I think this discussion highlights one of the most important aspects of personal finance: you have to know yourself, know your strengths and weaknesses. Credit cards are not evil, but they can lead to bad things. If you know or feel that they’re going to lead you into trouble, try not to use them.
On the other hand, if you have the discipline to use them responsibly, they can be a useful tool.
For myself, I spent ten years without credit cards because I knew that they would just make my situation worse. Now, though, I’ve had one for a year, and things are fine.
Know yourself. Know your strengths and weaknesses. Do what works for you.
August 22nd, 2008 at 10:09 am
Cory can probably maximize his mobilephone whenever he purchases stuffs. There are free mobile apps that can keep track of your daily spending. By having an easily accessible object near you to monitor your spending, you won’t be surprised if the credit bill comes.
Sam
Fix My Personal Finance
http://fixmypersonalfinance.com/
August 22nd, 2008 at 10:21 am
I keep a budget in Excel and follow my transactions to the penny whether it be debit, credit, or cash (well, sort of. I track cash withdrawn and leave it at that). So all transactions are treated the same and I follow the balance that is in Excel, not my bank account. then I pay my CC bill at the end of the month. (I also keep careful track of my actual bank balance by using Quicken and make sure that balance matches my Excel estimates at the end of the month.)
I got a Discover More card to start racking up rewards. Just pushin’ money through the card to build better credit and gain rewards, with regular bills/expenses I’d be paying anyway.
August 22nd, 2008 at 10:22 am
Why not keep a little check register for the credit card? Add a post-it or piece of paper to the wallet and everytime you buy something with the credit card, write it down. It’s not high tech, but that way every time you use your credit card you have a visual reminder of what’s gonna come out of that wallet in terms of $$ when the bill comes. It might make the expenditure seem more “real.”
August 22nd, 2008 at 10:44 am
Cory - since you keep your checking balance in your head, why not just treat the credit card the same as your debit card - charge $50 on the card, subtract $50 from your balance. When you go check your balance online, you’ll find it to be $50 higher than what you expected, so you’ll need to remind yourself about the credit cards, but once you get into the mode, it should be automatic - a little light bulb will go off and you’ll think about the credit card.
August 22nd, 2008 at 10:59 am
debit cards are NOT evil
if anything i’m probably saving money because i don’t have to carry all that loose change around in my pockets (which i probably end up losing anyway)
August 22nd, 2008 at 11:06 am
@Richie:
Credit has more effect on a person than just simply borrowing money (ie: house or car loan as you said). It is used in the rental process and job searches as a gauge of responsibility and trust. Obviously if you have a poor credit history, or none at all, it will be difficult to rent an apartment/house. As far as being part of a background check in certain job searches (especially when access to money is involved like banking, retail, brokerage, etc) a poor credit history is a sign of financial trouble and one could be tempted toward dishonorable actions. There are many times when people are convicted of embezzlement or employee theft, the investigations reveal financial difficulties which is why a credit check is now being used in more often in addition to criminal background checks.
And in referring to your comment about the Visa/MC logo, you are incrrect. Just because the debit card is sponsored by one of the two credit card companies it is not extended the privleges of credit cards. The only thing it means is that it can be used anyplace where Visa/MC are accepted to pay for a purchase as opposed to a standard ATM card. There are no extended warranty protections, or price match protections as the all of these features are set forth by the individual institutions that sponser each particular card.
August 22nd, 2008 at 11:15 am
I don’t know for sure, but I can’t imagine many landlords (or employers) would turn down an applicant with no credit history (or a very limited credit history). There are plenty of people with bad credit histories who are able to rent.
That’s not what the Visa website says:
“Use your Visa credit or check card to make purchases at millions of locations. Visa will always protect you from unauthorized use.”
August 22nd, 2008 at 11:23 am
I am 42 and have never had a credit card until I moved to America 3yrs ago. I only have one now because I need to build a credit rating. The US financial system considers me a ‘youngster’ like Cory!
During the past year I have been working hard to understand all the nuances of your system in order to protect my family’s finances. It’s by no means easy, but starting out well seems to be vitally important. I applaud Cory for wanting to set good foundations.
Ultimately it seems that the old ways are the best; don’t carry a balance, track your spending etc. The tips here on tracking CC spending are great. Thanks! I have been having trouble with this too. I always keep my receipts, but have to go hunting each month for online receipt printouts and transaction receipts to check against my CC statement. I knew there must be a better way!
I am also one of those people who has never used a checkbook register. I come from a country that doesn’t use checks!(I also don’t like the idea of carrying all that financial info around in my purse.)I log my checks in the register, but nothing else. The rest goes onto a spreadsheet.
Re: paying CC expenses weekly. How do you do that? My husband recently paid his monthly bill a few days early (so that he wouldn’t forget) and was charged a $4 penalty.
@ Richie - take it from someone who knows, having no credit history hurts your wallet massively!
August 22nd, 2008 at 11:24 am
Yes, you are correct in that specific instance. But your original remark was that you are afforded the same protections of a credit card. If you look at Visa Security Prgram the only protections you get are against fraud and identity theft. There are many other protections that a credit card grants the user, including (but not limited to) the couple I used as examples.
August 22nd, 2008 at 11:24 am
Jane, what country are you from?
August 22nd, 2008 at 11:26 am
When I first got a debit card, I trained myself to keep track of all my purchases in a register (Bank of America has really small registers, about the size of a business card, that are perfect for this). When I decided to get a credit card to build up credit, I simply continued doing the exact same thing. Every purchase I made with my credit card, I would subtract from my checking balance (same if I used the debit card). Then every month I would pay the credit card, and the actual balance in my checking account would match up with the register. Doing this, I had absolutely no problem “feeling the money leave.” These days, I have a blackberry with an application called Ascendo Money. It keeps track of multiple accounts all in one interface, so now my credit card transactions are separate from my checking transactions, but all of the balances show on the summary page when you first open the program, so I can easily see how much is on the credit card. I keep track of all my checking, savings, credit cards, and car loan all in this one little program on my phone, and it has a desktop application that it integrates with.
I’m sure there are some drawbacks to doing it the way I did, since you can’t really tell what was on the credit card and what was on debit, but I never had any problems with it. I highly recommend that method to those who have trouble overspending on their credit cards, especially those who are just starting out with credit cards.
- Vanessa
August 22nd, 2008 at 11:38 am
One of the things my husband and I both did was to get an AmEx card as our first credit card. It’s been our only card for years. With AmEx, you HAVE to pay the balance every month. So we’ve done that for 15 years. If it’s a big purchase (couch, whatever), we save up the money ahead of time, charge it on the card, and pay the bill immediately.
We use AmEx blue to get cash back. By charging everything–groceries, gas, etc. at 5% back–we’re making $600+ a year by using the card, we’ve established excellent credit by paying the card off every month for 15 years, and we have a credit card for “emergencies,” though we also have an emergency fund for that.
August 22nd, 2008 at 12:08 pm
@Jane: a $4 penalty for paying early on a credit card? I’ve *never* heard of such a thing, among all the cards my partner and I have ever had. Makes me worry what other expensive nonsense that card might be sticking you with. Consider dropping that credit card in favor of a more consumer-friendly one!
August 22nd, 2008 at 12:09 pm
I also only use my credit cards for large purchases, like air plane tickets, etc. I moved across the country recently and put the trailer on my card. Because they are large purchases, it’s easy to remember they are hanging out there.
But a trick I use is to keep a running list of bills I need to pay each month by date they’re due, (water, electric, cable, credit card, rent, etc) and then check them off when I’m through. When I make a credit card purchase, I add the total next to that line so I know exactly how much I’ll need to pay when the bill rolls around. This also means I’m never late on bills!
August 22nd, 2008 at 12:14 pm
I try to act as if the credit card is a debit card. As soon as I buy an item on the credit card, I would pay it off online immediately. By the time the statement comes, it is always a zero balance. I cringed the first time I had to let a balance go unpaid and actually pay interest. Once you have a balance that you know you can’t fully pay off that month, you might mentally stop keeping track and that is when debt grows. Be weary of the mental statement “I will eventually pay it off so why not?”
August 22nd, 2008 at 12:14 pm
I’ve been “off” credit cards for the last year and a half. I use my debit card for day to day expenses. Spending present (already in my account) money helps us to stay on target with our spending. For us it was too easy to spend without limitation when using credit. I don’t think credit cards or evil but I wish I had stuck to debit in my youth.
With our debit cards we each have an allowance ($500 a pay check or $1000 a month) to use for misc. expenses including gas, groceries, eating out, clothes, etc. I check the debit accounts 2 or 3 times a week and I use a check register. When Mr. Sam is getting close to the limit I warn him because he doesn’t pay attention to finances at all. Extra money is rolled over to the next pay period. So if I only spend $300 one pay period I get $700 the next pay period. We use an allowance system because for us if the money is in our checking accounts it gets spent.
We still have credit cards (we each have one) and we use them for travel, for business expenses that will be reimbursed by our employers and for large purchases that we want extra protection for. I don’t carry my credit card unless I’m traveling.
Our Visa debit cards provide much of the same fraud protection as a credit card and we also earn “points” with our debit cards.
If you want to build your credit by using credit cards I would have all your bills like phone, cell, utility go to your credit card each month and stick to debit for the rest of your day to day spending.
Good luck to you.
August 22nd, 2008 at 12:26 pm
It seems to me that Cory should just subtract the amount he spends from the total he has in his head regardless of whether he is using the credit card or the debit card. The only problem is that when he looks at his checking out it will look too high. He’ll have to look at both his checking account and his credit card account. There are ways to be able to set up your system so you can do this easily.
**
What I do is rig my checkbook register. Instead of just showing what’s in my checking account, I also use columns to show me what is spent in my two credit card accounts and then I have another column where I can keep track of my running total.
Spending on my credit card does feel a little different because I know I don’t have to already have the money in my checking account. But now that I have several budget categories, I’m very aware of the consequences of various types of spending. For example, if I’m eating out too much, there’s less to spend on other kinds of fun. If I replace my tires, that’s not a worry because I have a fund for car repairs.
August 22nd, 2008 at 1:08 pm
Put me in the “debit cards are evil” camp. Sure, Visa and MC may currently offer the same or close to the same security protection as for credit cards. But that’s currently. At any time they could choose to drop protection back to what’s guaranteed by law, which could leave you stuck with $50 for credit cards and $500 for debit cards. And the raw numbers aren’t the whole story - there’s also differences in how fast you have to report it; and we all know that if your debit card is used fraudulently, the money is gone from your checking account until you convince the bank it was stolen.
Also, I will never realistically “overdraft” my credit card, but I could easily do so with my debit card.
It’s actually been a struggle to get my bank to give me a non-debit ATM card. They can issue debit cards at my branch but non-debit ATM cards have to be issued by the head office and mailed to me - and the last time they sent one, it got lost in the mail!
But, to do a huge about face: As to the original poster’s question, if using a credit card doesn’t work for you, don’t use one. You don’t need to actively use your card to build a credit history. Just having the card account open is enough to build it.
In theory if you never use a card, the bank might cancel it, but in practice my experience has been the opposite - the issuers of the cards I don’t use send me special offers once or twice a year, just enough for me to switch over long enough to take advantage of the offer, before switching back to my main card.
August 22nd, 2008 at 1:08 pm
My wife and I charge everything and never carry any cash (just a few dollars for emergencies), and pay our balance online in full every month. While I have 10 (!) credit cards, only 3 of them are in current usage. 3 are with chase and 3 are with Citibank, so that makes it much easier to track them all. However, both Chase and Citibank limit the number of online payments to 4 per billing cycle, so you cannot pay each time you make a purchase.
Because everything is charged, this leads to a fairly high balance at the end of the billing cycle. While it is paid promptly, it is the statement balance that is reported to credit reporting agencies, causing my credit report to show high balances. This can be easily remedied simply by scheduling an online payment for the current balance on the day the account closes.
The account then closes with either a $0 balance (and no payment is due) or the small balance of charges that posts the same day as the payment and the account closing. If there is a balance due on the statement, then a few days before the due date, I’ll post a payment for the full outstanding balance. I will therefore make at most 2 payments per billing cycle, have very low or $0 balances reporting, improving my credit, and make the payment fairly close to purchase date, with never more than a 3-week lagtime.
August 22nd, 2008 at 6:37 pm
I like the idea of the ING sub account. I’ve considered paying off the credit card as soon as I’ve spent it, or paying it off weekly instead of monthly, but then I’m losing the interest I could earn on that money if it was in my checking or savings account. I like the idea of moving it into an ING subaccount instead; that way I know I have the money (not spending it) and I’m also earning interest until the CC is due.
August 22nd, 2008 at 11:24 pm
Myself and my husband use credit card only for our monthly expenses and pay it off on the day the statment comes. Using the credit card helps us get our reward points and some free stuff. We know our monthly income and we have target dollar amount that we wish to save everymonth. So to reach our target saving amount, we can’t pay more than 1200 in our credit card bills. We do check our account quite frequently and always look at teh available balance (rather than current balance), that reflect almost instantaneouly how much you have spent. As soon as we reach $800/$900 in our credit card, we become very wary and spend with caution. Once we reach $1200, we make sure we dont’ use credit card. After that we use debit if it is an essential expense. otherwise we put it off to next month. This has been working very well for us.
August 22nd, 2008 at 11:25 pm
What I like to do and is possible for me since I have unlimited transactions in my checking account is to make payments for the exact amount that I spent.
Right now I have:
52.50 on clothes
15.00 for my auto coffee card
16.XX random expense
40.00 for a ball I went to
So I will individually pay for those expenses by online bill pay. It lets me glance at my bill and be able to match up expenses. If I can’t pay for an expense all in one shot, I’ll divide it over two/three weeks and pay an equal amount on it per week.
It’s when I start paying 51.91 because that’s all I have left in my checking account that I get all confused about how much I owe.
I recently got frustrated with a card I owned because they would take 3-4 days to post both purchases and payments. Thankfully they discontinued it and the card I’m using now shows all pending transactions the minute I buy them and takes 1-2 business days for payment. Which is the way it should be I think.
August 23rd, 2008 at 11:37 am
@Karawynn - the credit card company applied the payment to the previous months cycle because he paid within that cycle. They didn’t bother to see that the balance was already paid off. This then triggered a late payment fee on the cycle that the payment was intended for. He called them, fought over the fee, but it was still listed when the statement came. Lesson: Don’t pay early.
August 23rd, 2008 at 1:19 pm
While I do not necessarily think there is anything wrong with using credit cards, a couple of things irk me about using them (I use 100% debit card/cash). Mainly, as it is referred to as the “psychology” of it, it really is like spending money that isn’t yours. There have been numerous studies done all concluding that when you use credit cards to buy things you SPEND MORE. I’ve heard anywhere from 14% to 41% (that being at McDonald’s) more is spent when using credit. It doesn’t “hurt” as much psychologically as the direct tie to cash is not immediately felt.
While you feel you are getting a deal by earning your “points”, in reality the credit card companies know that more likely than not you’re going to spend more on credit than in cash/debit and it is all built in with the “points”.
Couple this with the many other practices common to the industry and I’d much rather skip it all together and just pay cash. Besides, I won’t have to carry a “credit card register” or use Quicken or yet another spreadsheet to keep track of more transactions.
August 23rd, 2008 at 2:13 pm
I find that only buying things I can afford solves any issues with using my credit card.
Pay it off every month. Don’t pay interest on depreciating assets (which is just about everything you buy with a credit card.)
August 23rd, 2008 at 7:52 pm
Noticed that myself (and just linked back to my not too read blog) on our first CC free vacation, but the few charges I did put on a CC feel like free money because it didn’t come direct out of my bank account.
August 23rd, 2008 at 8:34 pm
I have read all the comments and have nothing to add - there are tons of suggestions to chose from!
I would, however, like to advise Cory to start keeping track of his expenses either on paper or on the computer. The mental method is great, but someday very very soon (I am 23) life (or work) stress will get the better of you and you will start to forget and lose track. The last thing you need when you are stressed is not knowing how much money you have!
Personally, I like quicken. I have every account entered in there and I can see my net worth at a glance. Recently, I set it so that my student loans and retirement savings don’t show up on the main list so I can see my “mini” net worth - just checking and savings and credit cards. For years in college I used a register and notebook to keep track of everything and that worked great as well.
August 23rd, 2008 at 9:12 pm
Everyone,
Thanks for all of the replies! I never expected such a big response. It sounds like the two biggest solutions I’ve heard are:
1. Keep track of your spending/ make a budget
2. Set cash aside
I think I will do my best to do both of those things. I have sort of been waiting on the budget thing until school starts in the fall, and my spending habits become regular again.
I know many people here do not like CCs, but I appreciate the freedom– I do web design, so I don’t have a regular paycheck every month. If I know money is coming, and I need to pay for things, it’s nice to be able to do that, instead of borrowing from my parents until the check arrives. Also, I have all of my savings at ING Direct, so I try and keep it in there as long as possible, to maximize my earnings. I try and make most, if not all of my payments on my CC (Chase freedom), so I can save up the cash rewards to put into my Roth IRA.
I also make sure to NEVER carry a balance. That hasn’t been a problem so far. I can keep track of how much I spend vs. how much is in my account, I just don’t FEEL it like I did spending cash. I think somebody mentioned earlier that it sort of feels like paying for something twice- once when you make the purchase, and again when you pay the bill. I think that perfectly describes how I feel, and probably just stems from a (healthy?) fear of spending money.
So again– thanks for all the suggestions!
Cory
August 24th, 2008 at 12:07 am
Basing your spending on your checking account balance is a primitive (this is not derogatory!) form of budgeting, in that you are always forced to spend less than you own. It can work well, but you have discovered one of its limits.
I think it’s more effective and efficient to develop a true spending plan for all the categories of spending that you do: housing, communications, transportation, clothing, food, etc.
It sounds like you have irregular income. So you could try either budgeting to spend the money that you earned LAST month. Or, you could figure out your average monthly income and budget that amount only.
Also, usually there are two or three categories that you will need to control the most. For me, it’s food.
Most of my other monthly categories are already taken into account by my budget, so all I really need to pay weekly attention to is how much I am spending on food. I know I need to keep it under $x.
Any other spending that would fit in another category needs me to look at my spending plan to see how much I have available for it. If I want to buy clothes, I need to see how much I’ve saved so far this year for clothes. If I want to buy stuff for the car, I need to look at the car budget.
Regarding the nuts and bolts of how to easily track your expenses when you spend out of multiple accounts:
Every time you spend or earn money, get a receipt or make one yourself.
I have tried many ways, but what works for me is, I always ask for a receipt when I am shopping. If it’s a credit card receipt, I write which card it is on top so I don’t have to decipher it later in the week. If I’m spending cash at a place that’s not set up for making receipts, I either ask them to write one for me or (for some cash purchases at, say, a farmer’s market, or for money at a coffee shop), I just take a piece of paper and write out my own receipt: ($1.80, cash, food out 8/23/08).
Then, what do you do with all these receipts?:
Every day or two I empty my receipts out of my wallet and put them in a clay pot by my computer.
Once a week or so, I grab the clay pot and enter all the receipts in it into my financial program (an excel spreadsheet that I designed that keeps a running account of each financial account and each budget category).
After I enter them into my spreadsheet, I just stuff the receipts in a box that I have designated for the year. I just put all of them in there, on top of the ones that are already there. They are in roughly chronological order, and this way I don’t even need to spend time deciding which ones to keep– I keep ‘em all, and they just all go in a box. They don’t take up much space, and if I ever need one, I just root through. It works great!
Now I always know where I stand in all my accounts. The key to the system, though, was finding a place to put all my receipts (the jar!)
August 24th, 2008 at 12:28 am
Basing your spending on your checking account balance is a primitive (this is not derogatory!) form of budgeting, in that you are always forced to spend less than you own. It can work well, but you have discovered one of its limits.
In my experience, credit card spending starts to feel like cash spending once you have a rock solid system for tracking it and only use the card when you actually have cash that backs the purchase. In other words, you don’t use the c.c. for credit, you just use it as a form of payment. Once I got firmly in that mentality, it started to feel much like cash to me.
Overall, whatever form of spending you use, I think it’s most effective and efficient to develop a true spending plan for all the categories of spending that you do: housing, communications, transportation, clothing, food, etc. I budget monthly amounts for each of these, and some of them build up for months before being used.
It sounds like you have irregular income. So you could try either budgeting to spend the money that you earned LAST month. Or, you could figure out your average monthly income and budget that amount only.
Also, usually there are two or three categories that you will need to control the most. For me, it’s food.
Most of my other monthly categories are already taken into account by my budget, so all I really need to pay weekly attention to is how much I am spending on food. I know I need to keep it under $165. That’s pretty much all I need to track all month long.
Any other spending that would fit in another category is rare enough for me that it needs me to look at my spending plan to see how much I have available for it. If I want to buy clothes, I need to see how much I’ve accumulated in my budget for clothes. If I want to buy stuff for the car, I need to look at the car budget.
Regarding the nuts and bolts of how to easily track your expenses when you spend out of multiple accounts:
Every time you spend or earn money, get a receipt or make one yourself.
I have tried many ways, but what works for me is, I always ask for a receipt when I am shopping. If it’s a credit card receipt, I write which card it is on top so I don’t have to decipher it later in the week. If I’m spending cash at a place that’s not set up for making receipts, I either ask them to write one for me or (for some cash purchases at, say, a farmer’s market, or for money at a coffee shop), I just take a piece of paper and write out my own receipt: ($1.80, cash, food out 8/23/08).
Then, what do you do with all these receipts?:
Every day or two I empty my receipts out of my wallet and put them in a clay pot by my computer.
Once a week or so, I grab the clay pot and enter all the receipts in it into my financial program (an excel spreadsheet that I designed that keeps a running account of each financial account and each budget category).
After I enter them into my spreadsheet, I just stuff the receipts in a box that I have designated for the year. I just put all of them in there, on top of the ones that are already there. They are in roughly chronological order, and this way I don’t even need to spend time deciding which ones to keep– I keep ‘em all, and they just all go in a box. They don’t take up much space, and if I ever need one, I just root through. It works great!
Now I always know where I stand in all my accounts. The key to the system, though, was finding a place to put all my receipts (the jar!)
August 24th, 2008 at 6:22 am
@ Ritchie, who observes, “I can’t imagine many landlords (or employers) would turn down an applicant with no credit history (or a very limited credit history). There are plenty of people with bad credit histories who are able to rent.”
Most landlords who have a decent place to rent and who care about their properties do careful credit checks. If an applicant is an unknown quantity, the landlord would be nuts to rent to him or her. There certainly are apartment complexes that rent to people with no credit history — in my neighborhood we have a few of them across the main drag — but they aren’t places where you’d want to live. A young man told me, while I was waiting for a bus in front of one of those complexes, that he was riding the bus because his car had been stolen out of the parking lot, and that everyone in the complex eventually had their car stolen, broken into, or vandalized. One of the outfits does weekly rentals, no questions asked: this is why our neighborhood grocery store is frequented by guys with tears tattooed down their cheeks and why three neighborhoods within a half-mile of the tenements are under siege from burglars, thieves, and home invaders. Many folks who have no credit are in that situation for a reason…and it’s not a reason that speaks well for them.
As a manager who had a negative experience with an employee and who now knows how difficult it is to fire someone, I would want every tool I could find to assess a job applicant’s character. Former or present employers will not tell you about any drawbacks, for fear of lawsuits — or sometimes out of hope that you’ll take the person off their hands! So recommendations are useless. Other than credit bureaus and court records, what disinterested source of information is out there?
August 24th, 2008 at 9:08 pm
“but since I’m using credit, and not taking money out of an account”
What?
Check your checking account online and check your credit card online, subtract the credit card’s balance for the month from the checking account.
From how he is talking, he checked the balance of his checking account and saw debit transactions, wouldn’t the logical step be to check the credit card online as well?
August 25th, 2008 at 7:13 am
I was in the same boat about three years ago when I got out of school. All the advice about keeping track by hand or online is a good idea. Bank of America (they’re everywhere in MD) has a tool that tracks Net Worth online, so you can make sure that you never spend beyond your means. Making sure you’re responsible with the card is most important - the card is just a tool, its overspending that could grow into a problem. If you’re thinking about it, you’re probably in good shape with the situation though.
August 25th, 2008 at 8:08 am
While I am a huge advocate of using debit cards over credit cards, there are times that I do use credit. I use cash and my debit card for everyday purchases, and only use my credit cards for purchases that total over a couple hundred dollars. If he were to do it this way, I don’t think that he would have a problem managing his accounts. As long as he doesn’t use the credit card for every little thing, he should be able to remember his expenses as easily as he remembers when he just used his debit card.
August 25th, 2008 at 10:05 pm
One of these I’ll get banned for the way I make this point, but this is a good place for it.
In and of themselves, debit cards are not evil. The problem is that most people, including a depressingly high percentage of the people on GRS, are being stupid about using them.
If you have a debit card tied to the same account you pay your household bills out of, you are being stupid.
If some pinhead manages to scam your card, or someone punches in a $6000 cheeseburger into a POS terminal, or {insert crime/error/dumbness of your choice here} happens, you can start bouncing critical payments, like rent or mortgage. While you may be able to get the money back from the errant transaction, you may find little sympathy from companies that will now charge you more/increase your rate/evict you, etc. Or you might get lucky and just have to eat $400 or so in overdraft charges, which will generally be less than the long-term rate increases would cost you.
A debit card should be tied to an account that exists for the sole purpose of storing money to be expended by the card. No critical bills should be paid via debit card for the previously mentioned reasons.
There are any number of articles and posts on GRS that illustrate the stupidity of tying a debit card to your household account. The Consumerist blog has whole categories dedicated to the problems this causes.
I have two debit cards, one tied to a local bank used for repeating internet-based charges, the only one of these which could be called critical has a printed policy that they will contact me before terminating service if my card stops working. The other card is tied to my ING Electric Orange account and is used for large planned purchases for which I saved money in my ING savings. If something irritating happens, I fall back to a credit card while I straighten out the problem.
If either or both cards are trashed out for any reason, my critical payments are not affected because that account does not have a debit card attached.
I have been working my way off credit cards for routine stuff, but I recognize that there are times when I will need it. The recent case of a car repair exceeding my emergency fund springs to mind. The first repair stayed off credit, but the second had to go there.
So to be blunt, debit cards are OK if you don’t have a stupid setup.
August 26th, 2008 at 8:17 am
I agree with MikeVX above: it’s very important to make your critical payments come out of an account that is free from being messed up by a debit card mistake or fraud.
If one of my debt payments is rejected by the bank because of some kind a problem with my debit card, it will cost me thousands of dollars in increased interest.
To solve that problem, I just don’t use my debit card.
To me, the key is that at this point in my life I have a budget and ALL of my spending is controlled by the budget. It doesn’t matter if I’m spending cash, Krugerrands, or credit cards–If the budget says I don’t have the money for something, I either don’t buy it or find the money (cash!) from some other spending category.
When it actually comes to making a purchase,though, I almost always use my credit card in preference to cash. The credit card is just a way to make the transaction happen, and the purchase represents something I have already allocated cash for. It’s not debt because it gets paid out of this month’s budget.
August 26th, 2008 at 8:26 am
On a separate note, related to MikeVX’s post above, one interesting thing in MikeVX’s post above was, it points out that psychologically, having a credit card DOES open you up to spending beyond your immediate means. If he didn’t have a credit card, he would be forced to make some really hard decisions, like leaving his car off the road and finding some other way to get around, instead of using credit to get the car fixed right away.
Knowing that you have the option to use credit, in other words, makes it critically important that you are able to distinguish between wise use of credit and frivolous use of credit. Because you no longer have the backstop of “I don’t have enough money for that” to stop you from spending on the car. You have the option to charge it, and because it’s psychologically easier to just charge it, than to take the car off the road until you have cash, you will.
Which is not to say that repairing the car with credit was not a good idea. Only MikeVX can determine that. But if you do it, make sure you understand that you are employing credit, and it’s necessary to only do it with a firm payment schedule in mind–budget out the credit card repayment out of your income.
Even if you don’t have a budget, without the credit card, when pressure/temptation to overspend comes up, you can honestly tell yourself and other people (your girlfriend who is just dead-set on going to vacation in Maine, when you’re just scraping by, for example), that you don’t have the money. If you have a budget, you look at your budget and see whether you have the money. If the answer is no, you either say “I don’t have the cash” or “I’m broke” or “It’s not in my budget”, depending on who you’re talking to and what they’ll understand.
With the credit card, though, (and without a budget) there is a tendency to avoid the conflict and just go ahead and make the purchase (”go on vacation”)–just add it to your debt that you won’t pay off for 15 years. Of course you can “afford” it–you have the credit card!!
In my case, that’s how a lot of my debt got built up when I was younger. It was the combination of not having a budget, which meant not being realistic about my financial situation, coupled with access to credit, which made it possible to defer into the far future the need to take financial reckoning.
August 26th, 2008 at 10:53 am
Dave Ramsey talks about a study that was done by a university regarding using a card instead of cash to purchase things. They found that people on average spent 18% more for each purchase when they used a card compared to people that used cash.
The interesting thing about this study is that it didn’t matter if it was a debit card or credit card that was used for the transaction. The implication of the study is that you will automatically spend less money when you use cash instead of using a card. This alone makes cash the choice in our house.
Now, obviously this doesn’t apply to internet purchases, but only to transactions where cash is accepted.
The other thing that comes to mind as I read the comments above is that people spend a lot of time and energy keeping track of how much they charge on their visa. Is it just me, or does it seem like the convenience of a credit card is really overstated when you add in all of the extra effort required to track the spending?
We started using cash exclusively for in-person transactions a few months ago. One of the things that I like about cash is that you know how much is available at a glance - you just need to make sure you don’t lose the envelope!
August 26th, 2008 at 1:48 pm
@Brian: What if the study is confusing cause with correlation?
It sounds equally-to-more plausible that people who tend to spend more money would use a credit card (as opposed to carrying more cash), whereas people who tend to spend less would do so in cash.
August 26th, 2008 at 8:18 pm
I would think he could change absolutely nothing and just use the credit card instead of the debit card. In other words, keep the checking account balance in his head, deduct the amount of each purchase just as he is currently with the debit card, and don’t spend more than is in his checking account.
I don’t think this practice is necessary in the long run, but it would be a good transition, and a good way to drill in the fact that you are indeed spending the money you have.
August 26th, 2008 at 8:36 pm
I have to say, regardless of what anyone says, there may be the odd person who is the exception, but nobody can really “keep their balance in their head!” To my mind, the proof of that in this case is that, as soon as he started using a credit card, he lost track of how much money he had available.
I think the sense that you can keep track of it in your head is because actually you see your bank balance pretty regularly, so you constantly can do “course corrections” based upon what the bank says the balance is, and since you’re never TOO far off in a given week, you think you’re keeping good track. Now, throw a credit card in the mix, but keep trying the same system, and what happens is that you “correct” to what the bank says is your account balance, and “forget” about the money on the credit card. (My hypothesis).
I could be wrong in this case, but for me, I firmly believe (verified through experience) that:
“the best memory is not so good as faded ink”–Chinese proverb
August 26th, 2008 at 8:49 pm
I’m guessing someone has already mentioned it but… if you just have a credit card to get a good credit history why don’t you pay it as you go, then it will be just like a debit card. My credit card and my checking account are with the same bank so when I log onto my account online I can see both. At the end of the day, or once a week, I can transfer from my checking account to my credit card so my card pretty much always has a zero balance and I don’t lose track of how much money I really have.
Alternatively, my online view of my accounts has a ’sumary position’ at the botton of the page. It adds up all the money in my savings and checking accounts and subtracts the outstanding amount currently owing on my credit card so I always know how much money I really have.
August 26th, 2008 at 8:53 pm
I don’t know, but I would suspect that
people who don’t follow budgets would be more likely to spend 18% more when they use a credit card than when they use cash, than the budgeters. At least for me, since I’ve become a habitual budgeter, spending feels the same to me whether it’s in cash or credit. The fact is, I KNOW what I can and can’t afford, because I spend time every month doing my sums and seeing where the income and expenses lie. It doesn’t matter whether I pull the card out or the cash–$3 is $3, and it’s coming out of this month’s budget, and there’s no other money than this month’s budget unless I have a formal budget meeting with myself.
Credit cards in their nature are abstracted money–and unless you develop an abstract tool (in this case, a spending plan or budget) to perceive the flow of abstracted money, it’s kind of “invisible” to you. After all, you don’t “run out” of credit until you hit your limit. In many cases, that’s a 10,000-15,000 dollar limit.
That’s why people spend more when they use a credit card. It’s because they don’t have a device that they use as a matter of habit that lets them see that they are either within the lines or outside the lines of what they can prudently spend.
August 27th, 2008 at 10:14 am
What is the advantage of debit over credit, assuming you never carry a balance?
A debit card processes the transaction automatically, taking the money out of your account the same day as the purchase.
A credit card pays the merchant directly, but you don’t actually pay for the item until the end of the billing period.
Thus you continue to earn interest (time value of money) on that cash.
It’s also pretty easy to find credit cards with some sort of loyalty program (airline miles, points, whatever), many free. Do most debit cards?
As long as you never pay interest on the credit card balance (pay it off every billing cycle), I don’t see any advantage to using a debit card for anything.