Using credit cards that allow you to accumulate rewards or cash back is a great way to get more bang for your buck. It totally works as long as you start out with no credit card debt and stay that way. But this is also how many people end up in debt in the first place. (There’s a reason that card companies offer those plush rewards.)
Here’s how it happens: Emma opens up a cash back credit card and charges all her purchases to the new card in order to max out her cash back rewards. She starts off paying the balance in full each month, but then something comes up: she spends too much on holiday gifts or her work expense reimbursement check is late. Because she doesn’t have the cash that month, she’s forced to carry some of the balance over to the next month and before she knows it, the total balance is beyond what she can feasibly pay in two months and she spirals into credit card debt purgatory.
At this point, the only way for Emma to get back to debt-free is to stop using the card until the balance is back to zero. This is a scenario I see repeated again and again in my work. Rarely do people set out with the intention of burying themselves in debt. It’s usually a slippery slope that turns into a landslide.
Despite that cautionary tale, there is a right way to use a credit card for spending without getting into debt. I personally use a travel rewards card for every purchase I make, but I make sure to pay it off each month. Every couple of months, I get a $100 statement credit just for spending money I’d already be spending!
But it’s not easy. The key to success here is making sure you have enough cash available when it comes time to pay off your card each month, right? The only way to do this is to treat the swipe of your credit card as if you were laying down actual dollar bills – every single swipe, every single dollar even with emergencies or extraordinary expenses – actually, especially with emergencies or extraordinary expenses. And you can’t mix and match spending between using cash and credit, swiping your bank debit card here and your rewards card there. You have to pick one or you’ll end up in trouble.
I know that it’s hard to do when the dollars are still sitting there in your checking account looking so available, but it’s a matter of awareness and discipline. Personally, I track my credit card balance against my checking account on an almost daily basis. If the two balances get too close together, I know I need to tighten the belt a little until my next paycheck.
I know how tempting it is to only pay a portion of the balance, especially when you’ve had an expensive month. When I had to replace the engine in my car last spring, I dialed it back big time on discretionary spending so that I could keep it under control. I had to say no to some great fashion deals and invitations to dinner with friends because I also knew that if I succumbed to the temptation, it could be months before I felt back in control of my money – not worth it.
You know how you talk yourself out of eating an entire bag of chips by imagining how peeved you’ll be later when you’re sweating it out on the treadmill? Apply that same skill here and stay on top of your rewards card use. It will be so much more fun to redeem the rewards knowing that they truly are a bonus and not just something you are paying for in a different way with interest charges and the pain of debt.