What if you could have a brighter financial future by spending every dollar you earned? There's a name for this approach: Zero-sum budgeting.
When used correctly, credit cards can be a powerful credit-building tool. But how do you stay on budget when you use credit cards?
Follow these tips to stay on track with your budget—and your credit—while using your go-to piece of plastic.
Twelve participants are racing to boost their credit scores from 0 to as high as possible in six months. Their latest scores posted July 16.
Dupaco member Nick remains squarely in first place. His credit score inched one point higher, hitting 800. Two racers remain tied for second: Emma and Jimmy, with scores of 703.
The racer with the highest score at the finish line wins $1,000, with the second-place finisher receiving $500.
Why a budget is important
During Dupaco’s six-month credit-building competition, Great Credit Race participants aren’t just learning about credit. They’re also learning other important financial skills.
This month, racers learned about the importance of a budget.
Establishing and following a budget can help you:
- Prioritize your spending
- Manage your money
- Set funds aside for the future
Great Credit Race coach Mariko Kurobe walked her racers through a budget worksheet to help them identify their expenses and assign a job to every dollar they earn.
“Learning how to budget and save now will help you in the future when you have bigger expenses like a car loan or a mortgage,” she said. “And it’s easier to rework your budget to include those bigger expenses down the road because you’ve already established those budgeting and saving habits.”
Basics of using credit cards
Before incorporating a credit card into your budget, it’s important to understand how to use a credit card properly.
Doing so can help you establish and build your credit. That’s why each Great Credit Race participant received a Dupaco Visa credit card with a $1,000 limit at the beginning of the race. Racers learn how the proper use of credit can help build and maintain a favorable score.
When using a credit card, it’s important to:
- Pay your balance in full each month
- Make your payments on time
- Keep your credit usage in check, using no more than 20% of your available credit each month. (That’s because 30% of your credit score is based on how much credit you have available.)
The racers who are in the lead are doing just that.
Dupaco member Emma, currently tied for second place, doesn’t even wait for her credit card statement to arrive, according to her race coach, Kurobe. Emma’s strategy? Log into Shine Online Banking and pay off her balance each time she uses her card for a small purchase.
“Even using their credit card a little bit differently is affecting their credit so much right now because they have such a thin credit file,” Kurobe said. “One of the things hurting some racers the most is carrying a balance from month to month.”
Before you swipe, remember …
It’s easy to overspend with credit cards, and studies say as much.
Research has shown we tend to spend more when paying with plastic instead of cash. A lot more, actually. In a 2001 study, Drazen Prelec and Duncan Simester of MIT found shoppers spent up to 100% more when they made purchases with a credit card instead of cash.
Not only is it quicker to pay with plastic, but there’s another phenomenon at play. Forbes puts it this way:
“When someone buys an item with cash, they immediately know how much that item cost, which can be painful. However, when someone pays with a credit card, there is a time period between when they purchase the item and when they have to pay for it, which makes the cost seem less important, according to Psychology Today.”
How to use credit cards within your budget
So, how do you avoid overspending with a credit card?
Kurobe offers these tips:
|1| Set a credit card spending limit.
Once you establish a budget, you’ll know how much you can realistically afford to charge—and pay back—each month. Even though your card’s credit limit might be $1,000, that shouldn’t be your spending limit.
|2| Use eNotifiers.
Within Shine Online and Mobile Banking, you can set up activity alerts to receive real-time notifications when your credit card is used. This can help you track your spending throughout the month and keep your budget top of mind.
|3| Check in on your account.
It’s also a good idea to log into Shine at least a couple of times each week to take a big-picture look at your credit card purchases for the month. Do you see any surprises? Are there certain areas you’re overspending?
|4| Use the categories and flags.
Within Shine, your purchases are broken into categories, such as dining out. You also can use color-coded flags for your other budget categories. If you sort your purchases by category or flag, you’ll get a clear picture of how you’re doing within each budget category. That way you can make spending adjustments so you finish strong for the month.
|5| Shop with a list.
Regardless of how you pay, using a shopping list can help you avoid impulse buys. And it makes it easier to stay on track with both your budget and your credit.