How to budget with a credit card

My friend Evan doesn't know how to budget with a credit card—he refuses to even use one. He’s one of the bravest people I know but the thought of a credit card truly scares him. I once saw him take on an entire beehive with his bare hands just to help a friend—who frankly, didn’t deserve it. Evan is a self-proclaimed “cash guy” who feels the inevitable debt caused by credit cards can only be deterred by not using them.

But what if I told you my sweet, sweet Evan was wrong? 

Sure—in theory, it might be harder to actually go into debt if you only use cash. This idea may feel a lot safer to someone with financial worries and that’s totally understandable but the cash-only plan isn’t quite as airtight as some might think. 

Cash is great because you can’t spend what you don’t have. The cash-only method can make things easier in the short term by helping you manage impulse purchases and stay on track with your monthly budget. However, utilizing credit cards may have more long-term benefits than you might have realized. 

If Evan wasn’t so stubborn and listened to me about the benefits of budgeting with a credit card, he might actually feel comfortable enough to take advantage of them.

Using a credit card and paying it back on time improves your credit score, and this helps you in the future achieve lower interest rates on your mortgage or other lines of credit and higher spending limits. A credit card also provides thirty days to pay off your balance, giving you more time to manage your cash flow. On top of that, they provide security that you simply can’t get from carrying around cash. Would you rather lose a credit card that you can instantly deactivate or a wallet full of cash that’s supposed to last you until next month? 

Although it may seem easier to avoid the cards altogether—I’m here to share some ideas that you may not have considered and hopefully help you save some money and make some decisions that will benefit you in the future. 

The problem with credit cards 

Credit cards have certainly got some people into trouble in the past. They make buying things easy—a little too easy for some. Your first credit card is going to really test your self-discipline. 

For some people, the freedom and flexibility that comes with a credit card can be life-changing but for others, the endorphins produced when making a big purchase or the idea of “unlimited purchasing” can be overwhelming. 

Of course, not all credit card issues are caused by poor decision-making, sometimes it’s simply just misunderstanding. It’s common for people to fall into credit card debt because they didn’t have a proper understanding of how/when to pay their bills and not necessarily because of overspending. 

A credit card is a tool and like any tool, it can be used properly or improperly.

Managing credit card transactions without staying super mindful or having any prior experience can be a slippery slope and if you’re not careful it can certainly get you into a lot of trouble. 

Credit is necessary 

Whether you like it or not, going through life without using credit and establishing a credit score is extremely hard, if not impossible. You can try to avoid it all you want but when it comes to bigger purchases like a car, house or even going to school, you need to have credit.

Good credit allows you more flexibility, better interest rates and increased spending limits on some of the biggest purchases you will ever make, which will save you money in the long run.

The irony of good credit is that the people with the best interest rates are the least likely to actually take advantage of them. 

How can that be fair? 

Well, from a bank's perspective, paying back a loan can be hard for some people. Unfortunately, they need to charge higher rates to those LESS likely to pay the loans back to make up for the delinquency rates in those groups. 

Slowly improving your credit score over time shows the bank that you can be trusted to pay back your debts which will result in better rates. Building good credit is necessary but doesn’t happen overnight. It takes time and consistency but will be extremely fruitful for you once you get yourself there. 

Benefits to budgeting with a credit card

Despite popular belief, there are actually many great benefits to budgeting with a credit card. Properly using them will slowly improve your credit score over time. It also offers security against fraud and theft so that you don’t need to worry about getting money stolen. Having 30 days to pay off your credit card should also give you more cash flow.

Building your credit score

We’ve already discussed the importance of a good credit score and how it will benefit you and your family. Unless you carry a lot of debt already, building up your credit score with a credit card is actually pretty straightforward. 

Just in case it's not, here are some pointers:

Review your credit reports

If you haven’t already, you need to establish a baseline. Use a credit score calculator either through your bank or an online provider (Equifax, Experian or TransUnion) to see exactly where you sit. Don’t worry, checking your credit score doesn’t affect it. 

Get a handle on bill payments

Once you’ve determined your credit score, it’s important to start focusing on your bill payments and ensuring there will be no issues in repaying. 

Aim for 30% credit utilization or less

A general rule of thumb for credit cards is to keep your card utilization under 30%. Ideally, you’re able to pay off your credit card bill each month but if not, aim to keep your total outstanding balance at 30% or less of your total credit limit.

Financial security 

Depending on where you’re at in life, the term “financial security” may not mean a lot to you. If you’re just getting started on your financial journey, you’re probably worried about actually obtaining finances before you secure them—but as you get older or start to take on more responsibility in life, financial security will become more important. 

Credit cards provide you and your loved ones with a bit of a safety net should anything suspicious happen. If anything out-of-the-ordinary happens, your bank will notify you and help you solve the issue and if you lose your card, deactivation and reactivation are simple and won’t leave you down any money.  

Better cash flow 

For some people, having access to money they haven’t earned yet seems dangerous and can lead to poor spending habits. That same flexibility and ease that leaves the overzealous feeling overwhelmed, is the same flexibility and ease that the financially responsible truly appreciate.

If your money is tight and you’re actively trying to budget, having a 30-day grace period to repay the money you owe is extremely beneficial. Late fees and overdraft penalties can quickly pile up if you’re living paycheck to paycheck or experiencing an unexpected financial situation. Improving your cash flow will help you avoid unnecessary fees and further debt. 

Budgeting tips

If building your credit score, more financial security and improved cashflow all sound like good reasons to be budgeting with a credit card—here are some tips for you on how to improve your budgeting strategy: 

Set up notifications

One of the biggest problems with credit cards is that if you’re not staying mindful, things can quickly get out of hand. Turning on push notifications from your credit card issuer or bank will help make this easier for you. With credit card notifications you can stay on top of payments, avoid late penalties and reduce the chance of picking up poor spending habits or even just set up automatic payments. 

Align your pay cycle 

Most credit card providers are actually quite flexible with their pay cycles. Aligning your due date closer to your actual payday will help you pay off things as quickly as possible and should help reduce the stress associated with paying credit card bills. 

Reap the rewards 

If your credit card rewards aren't catered to you, it might be time to shop around for a new card. There are a ton of really cool options out there that benefit many different lifestyles. 

Some types of common rewards you may want to consider:

Cashback rewards 

Cashback credit card rewards offer incentives that can be redeemed as actual money. 

Travel rewards 

Travel credit card rewards offer points/credits towards things like hotels, flights etc. 

Gas rewards

Gas rewards offer discounts and incentives toward gas stations. 

Entertainment rewards 

Entertainment rewards offer incentives toward movie theatres, restaurants and more! 

Categorize your spending

When creating a budget, one of the most important steps is categorizing your spending and then tracking it. One of the biggest advantages of a credit card is the credit card statement.

Your online credit card account makes expense tracking incredibly easy and accessible and some will even break them down into categories for you. If you prefer the paper method credit card statements can be mailed to your house directly.

Managing individual categories makes things a little bit easier to understand and visualize. 

Final thoughts on how to budget with a credit card

Finding a budget that is sustainable and works specifically for you is key. Everyone’s budget is going to look slightly different, some people may have a need for a greater credit limit than others but the one constant between them all will be consistency and proper spending habits.

It’s okay if you prefer the old-school method, if that is truly what works best for you, but we hope that after reading this article you’re feeling more confident in exploring the other options and resources available to you. Some of them may be pleasantly surprising. The flexibility, security and trackable data that come with a credit card will not only make managing your expenses and building a budgeting strategy much easier but they will also help bring you peace of mind. 

Despite what you might have heard, credit card issuers and banks aren’t out to get you. It’s not in their best interest to screw you over; if anything, they actually want to see you succeed. After all, they share in your success.