One of the perks of a credit card is having the ability to make purchases now, rather than later. Back in the day, family heads saved money for needs as well as wants. Today, that mindset is unheard of. Our mindset is focused on the here and now. There is no desire or need to wait for purchases. All we have to do is swipe a credit card and we receive instant gratification.
There are a few things to keep in mind when using credit cards. One concern is your monthly lifestyle spending plan will never be accurate. Your monthly lifestyle plan consists of allocating your income towards your expenses. Those expenses include housing expenses, transportation expenses, living expenses, debt expenses and savings funds. The living expenses should include your anticipated personal needs and wants for the month. The mistake that most people make is underestimating their anticipated expenses for the month and resort to using a credit card to compensate for the difference. This does not give you a true account of your spending, which attributes to negative feelings toward spending plans.
In addition to not having a true account for your monthly spending, using a credit card on unaccounted for purchases may be an indication of living above your means. Living above your means holds you back from creating financial stability. This type of lifestyle is not sustainable, and your spending will catch up with you. Eventually, your credit card will reach the limit and you will resort to using funds that are earmarked for retirement to keep up with your spending habits. Think about how you will feel if you reach retirement age just to be told you do not have adequate funds in your retirement account. This means working longer than you desire. Getting a handle on your spending sooner is more beneficial than later.
Another concern of credit card usage is the inability to become debt free. If you are not paying off the balance in full every month, it is impossible to reduce debt if you are still swiping your card at every opportunity. If you make a minimum payment of $50 but charge $100, you are not reducing your debt. Also, if you are just making the minimum payment on your credit card, it will take years to pay off the debt due to interest charges. The accumulated interest can double or triple the cost of what you originally purchased.
One last concern with credit card usage is the influence it has on your credit score. The usage of your credit card is referred to as credit utilization. Credit utilization is the ratio of your outstanding credit card balance to your credit card limit. It measures the amount of the credit limit you are using. For example, if your credit card balance is $400 and your credit limit is $1000, you are using 40 percent of your available credit; therefore, your credit utilization is 40 percent. A low credit utilization shows that you are using a small amount of credit that has been given to you. A high credit utilization lowers your credit score and signals to prospective lenders an increased risk of you defaulting on payments. Because credit utilization influences 30 percent of your overall credit score, it is beneficial to keep your credit utilization below 50 percent.
Use this week’s financial goal of not using your credit card to change the way you deal with your finances. Change your relationship with money and start saving for purchases, living within your means, reducing credit card debt and improving your credit score. This starts your journey of building financial stability to allow you to live the lifestyle that you desire.