I didn't get my first credit card until I was 28 years old. For most of my adult life, I was and am still dealing with student loan debt, so I wasn't too keen on the idea of credit cards and adding more debt to the pile.
For years, I held out and faithfully used cash and my beloved debit card. But as I got older, I realized two things: If I wanted to improve my credit (which was good from my student loans, but not excellent) and travel for practically free through travel hacking, I'd have to play the game and get a credit card.
I started off small and as I got more comfortable I applied for credit cards with great reward bonuses, so I could travel for free.
Month after month, I dutifully paid my cards in full. But I started to notice something interesting. I was spending slightly more than I used to.
I had read study after study that people who use credit cards spend more money than their cash-spending counterparts. But me? No way! After not having a credit card for 28 years, I was in disbelief.
The numbers didn't lie, however. My spending had increased, even though just slightly. It's easy to pay for something now and think, “I'll pay for it later” and that later is a full 30 days away, after you get paid. But the real issue is, do you have that cash in your bank now? There have been times where my answer would be “no.” But I paid off my balance each and every month and patted myself on the back like a good credit card user.
The thing is, in personal finance we often think of responsible credit card use as paying your balances in full every month. Of course, that is a key component of being a responsible credit user. However, that is just the first step.
I think a large piece that is missing from the conversation is that most people do spend more with credit cards. Not only that, but it's key for people to know that to actually improve your credit score with a credit card, you need to keep your credit utilization below 30 percent. What that means is that if you have a $1,000 credit limit, you need to keep your balance lower than $300. Why? Because anything over a 30 percent credit utilization (which is fancy speak for how much of your limit you use) is considered risky.
It'll be a hard road to improve your credit, if you are consistently maxing out your card and paying it off in full. In order to actually improve your credit and keep your spending in check, you need to keep your balances low and use your credit card on things you were already going to buy.
When I saw that my spending was increasing — mostly from dinners out and happy hours (see, I'm an emotional spender), I decided to change things up a bit. I didn't like what I was doing, so I experimented.
For the past few months, I've used my credit card for things that I know I can't overspend on, i.e. health insurance, utilities, etc. For things like going out, I use cash as my “fun money” and limit myself to a certain amount. I found out where my problem areas were and have been using a hybrid cash/credit system, so that I can continue to build my credit and redeem travel rewards, while still keeping my spending in check.
I think that credit card rewards can entice you, even subconsciously, to spend more money. You think, “But I'm getting cash back and tons of miles!”. But if you are ultimately spending more than you would each month, it defeats the purpose.
If you are unsure if you are spending more money with credit cards, go on a cash detox for 30 days and compare your spending to previous months of using credit cards. You might be surprised!
How do you keep your spending in check with credit cards?