When you think about budgeting, you might think of distributing money in individually labeled envelopes or creating complex spreadsheets with different colors and fonts.
Budgeting can mean such things, but did you know that credit cards can be one of the most powerful budgeting tools out there? This sounds counterintuitive, as unsecured lines of credit can all too easily tempt many cardholders to overspend rather than save. But if you have the discipline, they can be a great budgeting resource.
If you suspect that you are an emotional spender, you should definitely stay away from credit cards until you have conquered this aspect of your financial habits. There are “good” types of debt (such as mortgages and car loans), but credit card debt is not one of them.
But if you have the financial maturity, follow these principles for successfully budgeting with credit cards.
Read more: How to use a credit card responsibly
Use your cards like cash
Whether you plan on intentionally using a credit card or not, the key to a credit card’s success is to treat it like cash. When you buy something, pay (almost) immediately.
You don’t have to wait until you receive your monthly credit card bill to make payments. Many of us, myself included, make multiple payments over the course of a billing cycle rather than one monthly lump sum. It’s not necessary (unless you’re making big purchases), but it’s a psychological maneuver I use to think of my lines of credit as cash and not just money.
I watch my monthly net income decrease with every credit card payment and it helps me stay on track. Plus, you never have to worry about late fees.
Use built-in budgeting software
Many credit card issuers (such as Chase and Amex) clearly track your spending and make it easy for you to quickly see how much you’ve spent in each category each month. It will show you how much you have spent on travel, food, goods, business services, etc.
This is huge for the diligent budget-keepers. You should refer to this very digestible (and beautiful) tool against the restrictions you yourself have set. If you have several days in a month and you have already spent an exorbitant amount on entertainment, you can immediately notice the trend.
Please note that this data will most likely reflect your spending since your last billing cycle by default. If you’re interested in monthly, or perhaps paycheck to paycheck, you’ll have to manually change the date ranges you want to view.
Source: American Express.
Issuers also often allow you to set alerts about your credit card spending habits. For example, Amex gives you the option to receive alerts when you spend a certain amount during a billing cycle or make a purchase over a specified amount. You can also get a weekly snapshot of your account spending.
Use different cards for different purchases
Now I have eight credit cards. Six personal cards and two small business credit cards. I like to separate personal and business expenses, and using small business cards helps a lot when planning monthly expenses.
Read more: 12 Reasons Why Credit Cards Are Essential to Financial Wellbeing
Whether you’re in a similar situation or just find it useful to put certain expenses on different cards, this can be another way to enforce your budget and classify your cash flow. For example, you might have a credit card for:
- Grocery stores.
- Monthly utilities.
- Gas stations.
- All the rest.
When you log in to your gas station card online account, you’ll quickly see how much you’ve spent on gas in a month. No other purchases were recorded on this account, or if they were, they were either fraudulent or you were spending impulsively.
This could be a way to take the noise out of a single card with a mile-long list of transactions. If you go over budget this month, you’ll find the issue on the “Everything Else” card.
Read more: Using multiple bank accounts to control spending
Add (and use) cards of authorized users
Many cards offer free authorized users or, in the case of small business cards, free employee credit cards. The magic budgeting trick here is that some banks (such as American Express) allow you to set spending limits that are unique to authorized user/employee cards.
You can simply add friends or family members to your card and keep them for yourself. Add as many authorized users as you have spending categories and set each limit accordingly. American Express allows you to lower each spending limit by up to $200.
Buy gift cards
One of the benefits of cash budgeting is that you are forced to stay within your means – otherwise you will simply run out of money. The danger of credit cards is that you can spontaneously make purchases and earn five paychecks if you’re not vigilant.
While not a perfect plan of attack, you can still emulate a cash-based budget with a credit card. I’ve done this myself before and it can really be helpful.
Many merchants sell Visa gift cards that can be used anywhere Visa is accepted. At grocery stores, you can often buy them in variable increments up to $500. If you set a budget of $200 per month for dining out, you can purchase a $200 gift card and mark it as “restaurants”. If your monthly entertainment budget is $150, you can buy a $150 gift card and mark it as “entertainment”.
In any category for which you want to make sure you don’t overspend, you can buy a Visa gift card for that amount. When the gift card runs out, you’ll be done until next month.
If you like this strategy, consider the bonus categories of any credit card you plan to use; you can earn bonus rewards on your gift card by tactfully purchasing a gift card from certain stores. For example:
- If you have an Amex Gold Card, you can buy gift cards from the supermarket. This card earns 4 Amex Membership Rewards per dollar on US supermarket purchases up to $25,000 during a calendar year (then 1 point per dollar).
- If you have an Ink Business Cash® credit card, you can buy gift cards from Staples. This card returns 5% on the first $25,000 you make on combined purchases each year of the account’s anniversary at office supply stores, as well as online, cable, and phone services.
The main downside to this strategy is that gift cards typically have an activation fee of $5 or more. If you don’t feel like eating $5 (this amount can quickly add up if you buy multiple gift cards), wait for periodic in-store promotions that waive this fee.
Small note: you (probably) can’t use your credit cards for everything.
A handful of expenses just can’t be done with a credit card. For example, most lenders will not allow you to pay for your auto loan or mortgage with a credit card. However, if it helps your budget to pass all payments through your credit card, there are loopholes:
- Plastiq is a service that charges a fee (2.85% at the time of writing) on any credit card payments, including mortgages and car payments. Use your credit card to pay for Plastiq and they will write a check to almost any biller or retailer for you. There are some restrictions associated with the card issuer, so research if that interests you.
- No annual fees Bilt Mastercard® is the only credit card on the market that allows you to pay your rent without a fee. You’ll even earn one reward for every dollar on rentals up to $50,000 per year. Please note that you must make at least five purchases per billing cycle to receive a reward.
With these services, you can pay your biggest monthly bills while still using your credit cards as budgeting tools.
Read more: Cash vs. Credit vs. Debit – Which Should You Use?
bottom line
Strict use of cash is an old and reliable way of budgeting. If you don’t use credit, you won’t end up in debt and pay horrible interest.
But the problem with this method is that you won’t strengthen your credit history or earn valuable credit card rewards by budgeting this way. If you know a few tricks, budgeting with credit cards can be incredibly effective, not to mention easy. Just be sure to budget for annual credit card fees if you plan to use cards that carry them.
Featured Image: Geobor/Shutterstock.com
