How To – Never Get Into Credit Card Debt

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A simple way to use credit cards responsibly.

The world is divided into two types of people – those who splurge and live life large, using their credit card as an additional source of income, and those who are so scared of credit cards that they have never used one.

And then there is a third category. They are the smart ones. They are the ones who use their credit cards the only way they should be. Who get all the benefits with none of the risks. These are the debt-less credit card users.

How does one get into this coveted category, though? It is a fact that every person who has ever used a credit card, meant to end up in this category, but became a splurger instead. According to a study of credit card users in the US, about 35-40% of credit card users carry a balance on their cards. Carry a balance, a.k.a. spend beyond what they can afford. How does this happen? Because our brains are excellent at avoiding pain. When you are forced to pay cash for a purchase, there is an immediate penalty in the form of pain on losing the cash. But with credit cards, the brain can conveniently ignore the penalty. And, with cash, it is impossible to overspend. Whereas, credit card companies basically depend on you overspending for a majority of their revenue. That is how the ones who started out to be the smart ones end up being the splurgers.

So why not just avoid credit cards altogether, if it is just so impossible to use them responsibly? Because they are a great tool in today’s financial world, and are something of a necessary evil. For one thing, they help you build a credit history, which will help you reduce MAJOR interest expenses, when you apply for a mortgage or an auto loan. And, in the near term, they help you spend for the same things you would usually, but with cashbacks, reward points and all other sorts of advantages. You can end up saving quite a substantial sum, if you use your CC simply to perform the transactions that you HAVE TO.

Okay, so you can’t avoid them, and you can’t misuse them. Don’t worry, the right way isn’t rocket science. In fact, it takes a few seconds. No, I’m not kidding.

How to use Credit Cards responsibly – the Method:

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  1. Establish a base level of spending every month on your CC. Again, it isn’t as complicated as it sounds. Let us take an example. Suppose your monthly utility bills, groceries, etc – the stuff you HAVE TO purchase – comes to about 1000. Keep a slight buffer – maybe another 100. So that means, every month, there will be a CC bill of at least 1100. This is your base level of spending.
  2. As you go through the month, make it a point to note down in a running list on your phone, any spending that you incur on the card, on things that you haven’t considered in your base level. For the first few months, this would include ALL discretionary spending.
  3. The day your salary (or whatever source of income you earn) is credited, total up your list of spends. Suppose this comes to 500. Add it to your base level. That will give you an estimated CC bill amount of 1600. Imagine that this amount is ALREADY DEDUCTED. So, if your salary is 2000, you now only have 400 to spend on other things. 1600 of that amount is earmarked for your CC bill.
  4. Once you get the hang of it, you will realize that even your discretionary spends are more or less standard. After all, eating out, shopping, etc. are usually spread out evenly throughout the year. You may have periods of dips and rises, but those would not be drastic. Here is when you level up your CC game. Establish a usual discretionary spend level. For example, suppose you notice that, usually it is in the range of 200-300. So assume it is 300. At this point, you no longer have to write down any of the usual discretionary spends!
  5. But there are still things you should note down. These are, what I call, unusual spends. These cover things like paying an annual premium for insurance, or buying appliances/electronics on your CC. These are major but unusual expenses, which would not get covered under your usual discretionary spend level.
  6. So, in our example, your base level is 1100, your usual discretionary spends are 300. If on the day of your salary, you haven’t noted down any unusual expenses, you have to set aside 1400 for your CC bill. On the other hand, if you have, add that to 1400 and set aside that amount.
  7. Since unusual major expenses are, by their very nature irregular, you should not be noting down more than a couple of such expenses per month. Any more than that, and you should consider moving some of them to your usual discretionary spend level.
  8. All in all, this should take you a grand total of – 30 seconds a month! Surely that is time that is well invested in order to never be surprised by a CC bill and scramble for funds.
  9. One last point – suppose your estimated CC bill is more than your salary, or more than what you can set aside. For example, if you are left with 400 from your salary after setting aside funds for the CC bill, but you have a mortgage payment of 500, it clearly won’t work. So what is one to do? Keep in mind that CC debt is THE MOST EXPENSIVE debt out there. So, do whatever it takes to pay it off. Whether it means dipping into your emergency fund, or borrowing from friends, pull all stops to pay the maximum amount you can. And reduce your spending the next month.
  10. And in case you are constantly struggling with CC debt, having gotten into a hole of interest payments and late fees, consider a balance transfer. I plan to write an article on that too, follow the blog to know how!

30 seconds a month, to ensure all the advantages with none of the risks of CCs – I think it is worth it, don’t you?

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