Credit is a financial tool that can be a dirty little devil if not used properly. It can be a great way to earn rewards or cash back on purchases, but it is often something that isn’t fully understood. Whether it be the lengthy terms and conditions that most people don’t read or the temptation to have a revolving credit line available to you, it’s all too easy to quickly rack up a balance you’re unable to pay off in full every month.
Key’s to Credit
Your balance should be paid off in full every month.
Why? Because credit card companies earn money through interest on unpaid balance and fees from late payments. You’re essentially paying them to allow you to have a balance. ✋ No thanks.
* Keep in mind, interest is calculated based on your entire previous statement balance, not just the portion that remains unpaid.
It should be used for needs and essentials, not wants that you can’t afford in cash.
Credit means a lender is extending you money to be paid back over a period of time. Knowing we have 30 or so days to pay back our balance in full often starts this psychological game that we have time to pay something back and puts us at risk of spiraling out of control.
We often justify purchases we don’t necessarily have the cash for or we overextend how much we can really afford (think homes or cars) because we have “time” to pay it off.
Understand your terms & ask the right questions
- What fees are associated with my card? Find out if your card has an annual fee, or a fee for foreign transactions.
- What is my interest rate? Is it fixed or variable?
- Does my card have an introductory period?
- What is my grace period? This the time from when your credit card statement becomes available to when your payment is due, often 21 days. After this, finance charges begin accruing.
* Educating yourself on the terms of your credit card will put you in control and less at risk of paying the bank more than is necessary.
Recognize when you’re making emotional purchases
Credit and emotions are a deadly combination. Credit is a tool, but can quickly become something that derails our finances. The key is to make sure you’re using credit wisely, and not emotionally. Here are 3 emotions to keep out of your spending habits:
- Fear: in a time of uncertainty, it’s easy to overspend on things if we’re driven by fear. The fear of gas running out (remember 2008/2009?! $4.00 a gallon 😭), the fear that COVID-19 created and individuals buying an abundance of toilet paper and hand sanitizer. Fear can lead to over purchasing, and overspending, resulting in a credit card balance at the end of the month that unhinge our budget.
- Wants: The flexibility of having a revolving line of credit is that it plays with our psychological desire to give into wants versus needs. By emotionally giving into wants we’re not spending our money in a way that provides us value. Take a breath before making a purchase, and really think about it; determine if you really need it or if it’s just a want. Will life be okay if you just walk away?
- Impulse: Ever been here? — You make your Target run to pick up three items and then popped into that cute dollar section in the front, next you quickly weave through the clothing section, finally you grab the few items you actually needed and suddenly, your total is over $100. 🤦 But you need to make sure to save 5% so you whip out your Target Red Credit Card!
Here’s the thing, Target is a woman’s best friend or can be our worst nightmare. You make a couple of trips per month and suddenly your credit card statement is nearly $500. By giving into impulses, they slowly build up over time and can become unaffordable. Ultimately, this puts you at risk of paying interest on something that doesn’t hold its value in a month from now.
Some tips when you’re dealing with emotional spending:
- Ask yourself: “Can I really afford this?” “Will I enjoy this one week from now? Two weeks from now?”
- When creating your shopping list, evision being in the store and write it in order of how you will walk around. This helps you stay on track and actually stick to the list when you’re there.
- Reward yourself for avoiding impulsive behaviors. By treating ourselves every once in a while (once a month) to a reward, we keep that irrational overspending at bay.
How to manage credit in a crisis
Whether it be needing to cover a medical bill, having a major mechanical repair on your car, or losing a job, it’s easy to turn to your credit card to handle the expense. It’s important to recognize that a credit card is not an emergency fund. A time of crisis is an OK reason to dip into your emergency fund and skip the credit card.
But what do you do if you don’t have an emergency fund and credit is your only option?
Tread lightly. Don’t overspend, and make sure you absolutely are only purchasing what is necessary. Then make sure you’re paying off as much of the balance as you can each month until it’s gone. This may mean sacrificing some discretionary spending, but that may be necessary if it means keeping a reign on your finances. If you owe for a service, such as a medical expense or mechanical, see if they can get you on a payment plan. Usually businesses are willing to work with you as long as you’re paying something.
What can you do next time?
Prepare and have a plan. Having a well stocked emergency fund and a handle of your debt is the best thing you can do for your finances. Read more about why here. Getting out of debt and creating a healthy relationship with it takes time, just like it took time to get into debt.
Don’t expect a change over night. Just been willing to commit and start making baby steps (like going to Target once a month instead of once a week 😉, I had to implement this rule!!)
If you’re tired of going at things alone, I’m here for you.
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”CC
Carolyn Rowland is in the Milwaukee WI, area.