One of the great debates in the financial advice world, extending into the personal finance blogosphere, is over credit cards. On one side, you have the Dave Ramsey view, that credit cards and most other credit should be avoided completely. There’s some validity to this perspective, especially if you’ve had trouble overusing credit in the past. Much as alcoholics should avoid all alcohol, if you are prone toward building huge deficits on your cards, you should rely on debit cards and cash.
On the other hand, for many others, using credit cards can have many advantages. As long as you don’t carry a balance, the charges on the card are effectively an interest free loan from the credit card company, allowing you to delay when the money for your purchases leaves your accounts (and when it stops earning interest for you). Additionally, many credit cards offer reward plans, allowing you to benefit from your spending.
As you can probably guess, I favor credit cards over debit cards or cash for most of my purchases. I do understand the risks, of course, and I do what I can to avoid spending too much via my credit cards. My main technique is to keep a credit card register. Essentially, I record every transaction I make on my credit cards in a notebook, writing the date, place, and amount (just like a check registry). I start each month with a particular budget, and subtract the spending with each purchase from this total amount. There are numerous advantages to this approach:
1) Record Creation – By recording every credit transaction as it occurs (or immediately afterward), you get a written record of my spending. The time you spend doing this is more than compensated when it is time to pay your credit card bill; you can double check your bill against the credit register in a fraction of the time it would take to gather and go through all my receipts.
2) Easier budgeting – If you keep a running tab of how much you spend, you will be in a better position to stick to a budget. You can allocate a set amount to spend each month, and subtract from that amount in your register with every purchase (just like you were using a debit card). Further, you can easily allocate portions of your total spending to different categories, and limit your spending in each category to a particular amount each month.
2) Decrease Spending – Alright, follow me here. It’s been noted that people spend more with credit cards than debit cards or cash. Part of the reason for this is that credit cards don’t seem like real money; you don’t get the bill until weeks after you’ve done the spending, and then, you only have to pay back part of what you spent. By keeping a register, you make the credit spending more immediate, and can see just how much money you have left in your ‘credit card account’. Not only should your spending decline as a result of this new perspective on credit card spending, but you can also lower the budget a little at a time, decreasing the amount you’re willing to spend each month.
As a result, I feel that using a credit card in conjunction with a credit registry is a good method, enabling you to use, but not abuse, your credit cards.