Saturday, May 24, 2008

How I use credit cards and not carry a balance

In an earlier posting, I shared my debt numbers. College left me with a legacy of over $2,000 in credit card debt and $11,000 of student loan debt, modest numbers by most standards. While in graduate school, I could postpone paying my student loan but not my credit card. I spent many years paying little more than the minimum on my credit card until I had my first job, and then with the increased income, it took me about a year to pay it off. So, how have I stayed debt free since then?

Now consumer-debt free, I was determined never to carry a credit card balance again. I hated seeing the finance charges for items I did not remember or, upon later reflection, did not need. I had a written budget for nearly six years at this point so I decided on a new course: subtract all purchases made by credit card from the spending plan.

I kept track of my credit card purchases for the month. My spending plan is on paper so I wrote a heading of "Credit Card" and started listing the store and the amount spent. For example, if I spent $34.49 at the Mobil gasoline station, I wrote down "Mobil $34.49". Then I subtracted the amount spent from my allocation for Gas and placed a check mark next to the $34.49 total. This would remind me when the credit card bill arrived that I had taken that money out of my spending plan and did not need to "steal" money from my savings account.

Using this method, my credit card balance was accounted for in my spending plan so all I had to do was write a check for the total amount and send it back to the credit card company. The money was removed from the spending plan once spent even if I did not actually debit it from my checking account until I received a credit card bill. However, there are some expenses that I did not place a check mark next to or subtract out of my spending plan. Why did I do this and how did I handle it?

I have several savings subaccounts with my credit union and ING Direct. These accounts hold money for house spending, car savings, charity giving or other items I am holding money for or saving toward a goal. If I spend money at the hardware store for exterior house paint, wood trim for replacement windows, tomato cages and a hose nozzle, I place it on a credit card and mark the total in my credit card charges listing as such: "Ace Hardware $37.43" but do not place a check mark after the entry. This reminds me that I have not subtracted the amount from my budget. However, all these items are grouped as "house spending" so when the credit card bill arrives, I then transfer money from my "House" savings account into my checking account, thus paying the credit card balance.

So what happens when I overspend? Yes, there have been more than a few times that I have spent more money than was in the budget and the items charged were not a house expenditure. While these are only occasional lapses, I do work within the framework of my spending plan and try not to spend more than a particular allocation. For those times I either have little control over the amount spent or I abuse a spending category, I use my savings account. For example, my spending at the veterinarian for one of my cat's exceeded the "Cat care" allocation in the spending plan. I do not have separate savings account for cat care, but when the bill was $283, I paid the balance not covered by my spending plan from money stashed in my savings account.

However, using the savings account to plug the hole in a spending plan can be a slippery slope. While it is true that the credit card balance is paid off each month, there are fewer dollars left in savings to help in a real crunch (e.g., necessary car repair or emergency water heater replacement). Use the savings account sparingly and always add more money into this account than is taken out. The best rule of thumb: replace the money taken from the savings account.

By removing money spent by cash, credit or debit from my spending plan, I can comfortably write that check for the entire balance of my credit card and prevent any finance charges being added to my account. This has kept me debt free for over six years and counting.

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