When they are used improperly, credit cards encourage frivolous spending. 'Buy now, pay later' has led many individuals to financial ruin when they overspend their ability to pay. High interest rates and low monthly payments lead to balances that can spiral out of control, until the cardholder is forced to pay more than the value of the original purchases.
Unmanageable debt can lead to grave financial difficulty, and even bankruptcy. As a result, using these cards for daily purchases and recreational shopping has become something of a taboo among much of the population.
Despite these warnings, credit cards are only as dangerous as the people who use them. Many people use them for small purchases, such as gasoline, and are diligent in paying off the balance each month. This practice can help build a good credit rating, demonstrating the cardholder's ability to use credit wisely and pay it back on time.
With a good rating thus earned, individuals are more likely to get good deals on loans, when they need to make large purchases such as a house or a car. Even for people who do not have any inclination towards developing their credit rating, however, there are other good uses of these cards.
Though it seems counterintuitive, with a little reinterpretation, they can be a powerful money management tool. For individuals who use their bank accounts for monthly bills like rent or mortgage payments, utilities and monthly dues and for daily purchases and discretionary spending, these accounts can be useful to separate all these different expenditures.
There are many ways to keep track of and categorize expenses, including the use of computer programs and paper ledgers. However, these methods are too time-consuming for many people. If used properly, these cards might be a good alternative.
For example, assume you have two checking accounts and a credit account. The first checking account (account A) is used for automatic withdrawal expenses: your cell phone bill, car insurance, gym membership, and so on. The second account (account B) is used for other expenses like groceries, clothes, gas, and entertainment.
You don't use the credit account much because you want to avoid falling into the debt trap. Although it is set up as an overdraft protection for your checking accounts, you keep it for emergencies only. Although this is a fairly good system, and one that ought to remain stable and reliable for some time, you should be putting it to better use.
Avoid the Hassle of Bookkeeping Software
Try using your credit card to pay for anything you think is a discretionary expenditure. This could include going to the movies, buying new clothes, eating out or purchasing some things that you don't need, but that makes your life more enjoyable. Of course, it goes without saying that you will need to be careful not to spend more than you can afford.
At the end of the month, when you receive your bill, you will need to be able to pay the balance without incurring interest fees. By doing so, you'll be able to see quickly and easily how much amount you spent that month on fun. The card company will keep track of your purchases and balance, so you won't need to fuss about bookkeeping software.
Use Them Carefully!
Of course, for serious record keeping, this method is not advisable, but if you would like to keep your frivolous purchases in check, the credit card could be one solution. You'll be able to see how much the balance varies from month to month, and make a conscious effort to use it less in the future months if you need to.
And if you're still worried about going into debt, try reversing the scenario; use your checking account for frivolous purchases and the card for necessary expenses. That way, you know you aren't using credit on things you can't afford.
As long as you maintain enough funds in the checking account to pay your outstanding off at the end of each month, you will be safe, and you could learn something about your spending habits.
Disclaimer: The mentioned details are for reference purposes only and do not directly recommend any specific financial course of action.