finance

Use Your Credit Card Like a Debit Card

I’ve never been much of a borrower.  Even as a kid.  I remember if someone had a toy or something that I wanted, I’d always ask if I could have it.  The typical response would be “No.  But you can borrow it.”  I didn’t like borrowing because I didn’t understand the concept of having something that wasn’t yours.  I mean, wouldn’t you get attached to it and not want to give it back?  Now that I’m older, I understand that there are times when it make more sense to borrow rather than purchase (i.e. when you need snow chains for a one-time snowboarding trip when you live in Southern California, books you’re not sure if you’ll like, etc.)  But overall, I still avoid borrowing as much as I can.

With the exception to education, mortgage, car and medical emergencies, I don’t really believe in borrowing money.  So racking up credit card debt to pay for things that I want was never much of an issue for me.  To the financiers reading this, I’m not talking about borrowing for investment purposes or buying stocks on margin or anything as advanced as that. 

I got my first card when I was about 16 years old.  It was a debit card.  I easily understood how it worked.  Your bank account has money.  When you use your card, money gets taken directly out of that account.  It was an easy way to track your expenses and it was safer and more convenient than carrying cash.  The principle behind it made sense to me.  So when I got my first credit card around the age of 18, I used it with the same mentality as I used my debit card – I only spent what I had (or less…much much less).

Several years and credit cards later, I still use that methodology.  With multiple cards, several bills to keep track of and a lot less leisure time, staying on top of this has gotten a little trickier.  In order to keep it up, I pay my all my credit card bills about once a week (usually Tuesday or Wednesdays so I have a balance of “0” before the weekend).  This is to ensure that my checking account is a relatively true reflection of how much money I really have.

Some people would ask why even bother having a credit card at all? Why not just use cash or a debit card all the time?  Two answers.

1) To build your credit.  Although if you don’t ever carry a balance, I’m not quite sure how much of a difference that would make on your credit score.

2) To collect rewards!  I used to use my rewards for getting Starbucks gift cards.  But now I use it to pay my credit card bill.  I used to have the mentality that “if I’m going to get a reward, I want it to be for something that I enjoy” and getting credit on your credit card didn’t feel that enjoyable to me.  But I changed my mind after I got my Chase Freedom card.  Since Chase gave new card holders $200 back in rewards, when I finally claimed my points for the first time, I think I had like $300 worth of credit I could use.  Getting $300 worth of Starbucks gift cards just seemed like such a waste at that point.  So I used it to pay my next bill instead and it made a big difference in my checking account.  I decided from then on, I would exclusively use my reward points for that purpose.

For people who want to get rid of minor credit card debt (less than $1,000), I recommend using the method that one of my former roommates used:

1) Stop using credit cards!

2) Use only cash or your debit card instead for new purchases.

3) Every time you get a pay check, use half of it (or some other designated amount) to pay off your credit card debt.

4) Keep doing this until your entire debt has been paid off.

5) After you debt has been paid off, you can start using your credit cards again as long as you use it like a debit card and only spend money that you have.

If you have a significant amount of credit card debt you want to get rid of, I suggest reading Total Money Makeover and following the get-out-debt recommendations there.

Disclaimer:  Original personal finance entries are of my personal opinion.  I am not a financial expert (though I am in the process of getting my CFP).  The advice I give is very general so it may or may not be the best available option for your unique situation.

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