Credit cards can be a great budgeting tool, but only if you use them properly. They can help you spot where you spend most of your money, earn cashback on purchases, build credit scores and more. On the other hand, misuse can lead to ballooning debts and high interest payments.
If you want to learn how to use a credit card effectively, our team has broken it down into its core pros and cons. Read this guide, and you should be fully equipped to use your credit card as a top budgeting tool.
How credit cards can help you budget
One of the better features of credit cards is that their accompanying apps and online banking usually have robust financial tracking. That means it can quickly track spending, categorise your purchases, and offer real-time insights into your finances. This type of insight is invaluable, especially when you’re trying to curb any high spending.
Combining this with other budgeting tools that can help you see exactly where your money is going and let you know when you’re reaching your spending limit for each category.
Benefits of using credit cards for financial management
Regular use of credit cards comes with a whole host of benefits, as long as you use them responsibly. Common benefits include cashback, building credit, and 0% interest periods. Of course, how you use your card depends on what benefits you have.
For instance, if you have 0% interest periods, you could use this to spread out the cost of a large ticket item. This is perfect when you need to make a large purchase, but don’t have the funds immediately available. Spreading out the expense is also good from a cash flow point of view, as it lessens the burden on your finances.
Risks of relying on credit cards for budgeting
Of course, overuse of these techniques can have negative consequences. Making too many large purchases over a short time can impact your available cash, forcing you to decide which bills to pay. If these issues continue long-term, you can face high interest rates and late repayment fees.
Credit card mismanagement can also negatively impact your credit score, marking you as a high-risk borrower. This can make it harder for you to borrow money in the future, and even affect your life goals. For example, it’s a lot more difficult to get a mortgage with bad credit.
Tips for using credit cards wisely as a budgeting tool
If you want to use your credit card effectively, there are a few tips you’ll need to follow. The first is making sure you pay off your credit card in full each month. This can have an excellent impact on your credit score and show you as a responsible spender.
You might also want to set spending limits on your card. This can help stop you from going over budget, especially if you’ve only allocated a set portion of your wages to your credit card spending. Even if you’ve got a poor credit score, getting a dedicated credit card for bad credit can help you stay on top of your expenses and improve your long-term credit score.
