How to Manage What Gets Charged to a Credit Card
Credit can be a valuable tool in your personal finance arsenal. It allows you to buy things you need and earn points or cash back. It also offers a way to conduct secure transactions online and provides some protections against theft and fraud. But, if not managed properly, it can be a road to high-interest debt that can be difficult to pay off. So, what is the secret to successfully managing what you charge to your credit card?
What Should I Charge to My Credit Card?
The best place to start when deciding what charges to put on your credit card is your budget. If you have already budgeted for an expense and know that you can pay for it, you can put it on your credit card. This will allow you to take advantage of credit card rewards while giving you peace of mind, knowing you can pay your credit card bill in full each month.
Examples of expenses that make sense to put on a credit card include:
- your monthly Netflix or Apple Music subscription
- your child’s monthly sports or music lessons
These are all items that should already be included in your budget each month. So, instead of using your cash to pay the bill directly, you have the option to use your credit card. You can charge the expense. Then, pay the credit card bill using the money you budgeted for the expense.
What Should I NOT Charge to My Credit Card?
While it can be tempting to put all your monthly bills and expenses on your credit card, it is not necessarily a good idea. If you put expenses you haven’t budgeted for on your credit card, you may not have the means to pay them when the bill comes.
Impulse purchases or purchases for friends or family who don’t have the money to make the purchase on their own should not be charged to your credit card. In both of these cases you don’t have money set aside to pay for the item. So, when the credit card bill comes you will have to find the money to pay for it elsewhere. This can mean taking money budgeted for something else to pay the bill or only making the minimum payment. Neither option puts you in an optimal financial situation.
It can also be tempting to put larger bills like your annual tax payment or a large legal bill on a credit card. If you put your tax payment on your credit card, you will face a service fee that can be nearly 2%. This makes your bill even higher than it already was. And legal bills can be large due to high hourly rates. This can result in high interest charges if you can’t pay the credit card bill in full when it comes due.
Should I Use My Credit Card for Emergencies?
Things in life happen that we can’t always plan for. And these emergencies often come with expenses. If you have to put more of your credit card than you can pay off in a month due to an emergency, that is okay. Be sure to pay as much as you can each month to minimize interest charges. And pay the bill off in full as soon as you can.
Best Practices for Credit Card Management
Only charge expenses to your credit card that you know you can pay in full when the bill comes. This will help save you money on interest. It will also help you build a good credit score. Your payment history accounts for 35% of your credit score. If you know you can pay your bill on time each month, this will help build up your score.
When calculating your score, credit scoring agencies consider your available credit to account for 30% of your score. They want to see a utilization ratio of 30% or less (lower is better). This means that you aren’t carrying a balance of more than 30% of your available credit (across all open credit accounts). Paying your bill off each month will keep your credit usage low and leave you with a larger amount of available credit.
Allowing your budget to dictate your credit spending will help you keep your usage in check. It will also allow you to use credit as a tool to help you out financially instead of allowing it to become a burden that weighs you down.
Kimbree Redburn is an Accredited Financial Counselor® with a background in economic development. She works with her clients to help them understand their financial options and make money decisions with confidence. She believes that financial education gives people a chance to build a better life.