Want to know the single best piece of financial advice I’ve ever been given?
If you wouldn’t go to a bank or credit union and ask for a loan to buy it, DON’T put it on your credit card.
I got this tip way back at the beginning of my financial career (like 2 years ago) at a Financial Literacy Conference. It came from Dr. Barbara O’Neill a member of the New Jersey Coalition for Financial Education. She’s a very smart lady.
The trouble with credit cards is, they don’t feel like real money. It’s not cash you have to hand to the cashier. It’s not a debit card that affects your checking account balance right away. It’s so easy to impulse buy or overshop with a credit card because payment is delayed. And all of the sudden 1 or 2 small purchases turn into 20 and it all adds up to a big balance. Worst of all, since you haven’t depleted your checking account or the cash in your wallet, you probably feel like you still have money to spend even though you’ve already burned through your monthly budget.
Another problem with credit cards? Interest rates are crazy high (average in the U.S. is 14.95% APR according to CreditCard.com). Why would you want to pay 14% interest on a purchase you could have paid for at 0% interest with cash or a debit card? You wouldn’t! You’re paying more for items in the long run just to delay payment for a few weeks or months. I’m sure you’ve been told before to pay-off your credit card balance in full every month, but how many of us actually do that? According to NerdWallet.com the average U.S. household in 2013 has $7,050 in credit card debt, which makes me think not too many of us are good at ante-ing up each month to pay off our credit card balance.
If you follow Barbara’s rule, however, you are less likely to drive up the balance of your credit cards unintentionally. Before you swipe your credit card, think “Would I ask my bank for a loan to make this purchase?” If the answer is “NO WAY” then pay with cash or debit instead. For example, you wouldn’t walk into a branch and ask for a loan to pay for a pizza, would you? If you were brave enough to do it I can almost guarantee that you will not be approved (unless that particular loan officer has a great sense of humor).
If you reserve your credit card for big purchases that you could ask for a loan for, like car repairs or furniture, you will be a much more cautious spender. It’s likely you’ll have done some research into what you want to buy, where to get the best price, and whether or not you really need it. If it’s truly something you might not have immediate funds ready to purchase, your credit card can help you get it. If you can pay for it out of your regular budget, do that instead. No more racking up your balance on nail polish or new going-out clothes from Forever 21 (not that I’ve ever done that . . . ).
With the holidays, Black Friday, and Cyber Monday quickly approaching it’s more important than ever to remember this rule. All the knick-knacks, decorations, gifts, and food that come with the holiday can really put a dent in your wallet. But putting all of those expenses on your credit card might not be the best solution. Set a limit to your holiday spending that fits your current budget, even if these means cutting back a little. Start putting a little money away each week (start today!) so you have money saved specifically for holiday shopping. And last but not least, see if your financial institution offers a Holiday Loan; the rates would likely be a lot less than your credit card and making the payments will improve your credit.
Leaving your credit card at home this holiday season might make your 2014 a little more merry and a lot brighter!