A simple strategy to manage your credit cards and avoid debt

To be honest, for a long time I was afraid of credit cards. That big ol’ interest rate, potential credit card debit staring you in the face, the purchasing power always tempting you to spend, etc. prevented me from signing up for one. I was content with my debit card and cold, hard cash.

However, as I began to teach myself financial responsibility and picked up habits that proved to be working for me and my financial goals, I gained enough confidence in my abilities to finally consider signing up for a credit card.

Prior to doing this, I did some research to learn about the benefits of credit cards and it turns out they are stacked with benefits if you use them responsibly.

Here are some potential perks you can earn by using a credit card:

• Earn cash back on some or all of your purchases
• Acquire flight miles for free or discounted flights
• Free credit score report
• Can come in handy during an emergency where you need to purchase something
• Fraud protection
• Build your credit score

These are all great perks, but if you don’t pay your balance off in a timely manner, a credit card can be a disaster.

If you’re careful about your credit card use, they can be a great financial tool. Here’s how I use my credit card without ever worrying about whether or not I can pay it off.

1. Create a budget

This is the most important element of my credit card strategy.

In my opinion, even aside from using a credit card, creating a budget for your money is absolutely essential. I recommend the zero-based budget (ZBB). The ZBB is where you allocate all of your money to your expenses (wants, needs, debts, investments) before you actually spend the money.

This allows you see exactly where your money is going and allows you to spend your money without feeling guilty as you’ve calculated an appropriate amount to a certain spending category.

I wrote an in-depth article on how I budget and offered up the (free) tools I use to help with my budget in this article.

2. Keep track of purchases

I use my credit card for 99% of the items/services I purchase. This way I can maximize my cash-back perks and build my credit (because I pay my balance off in time).

Everything that I purchase, I either immediately put it into my budget spreadsheet and the EveryDollar app or I keep the receipt and put it into the spreadsheet and app later.

It’s vital that you keep track of everything you spend when using the ZBB. When you record your purchases it should deduct from the spending categories you’ve created for yourself. The new total will show you how much is left over for you to spend in a particular category.

I treat the credit card like I treat cash. I only spend what I have, or in this case, what I’ve allocated to my spending categories. Because I’m budgeting properly using the ZBB, I know what I have left to spend, therefore, I won’t use my credit card on a category if that category doesn’t have enough left in it to cover the the item I was considering purchasing.

When sticking to this method, you will never spend more than you can afford and you will always have money to cover the balance of the credit card. This protects you from going into credit card debt and ruining your credit score.

3. Pay the balance

Naturally, as I make purchases with my credit card, the credit card balance grows. But that’s totally fine because I’ve budgeted my money and I know I have enough to cover the balance.

Because I’m using the credit card, the money in my bank account that I’ve set up for spending (I have a separate account for bills) never decreases until I’ve paid my credit card balance.

Again, I don’t have to worry about whether or not the amount of money in my spending account will cover the balance because I’ve already budgeted for this.

4. Reap the benefits

Now that you’re a responsible credit card user, you can start enjoying your credit card perks. Currently, I use a cash-back credit card. I earn 5% cash back up to $75 each quarter for certain purchase categories. These categories rotate every quarter. I also earn an unlimited 1% cash back on all other purchases. So far I’ver earned $157.66. That’s a free $157.66 I’ve earned just by using a credit card.

Credit cards can be an awesome tool when used responsibly. Remember to budget and track your expenses and you’ll be earning rewards and increasing your credit score in no time!

Originally posted on my personal blog Personal Personal Finance