Developing Healthy Financial Behaviors: Credit Cards

Credit cards can be difficult to manage and understand, but they are an everyday fact of life for many people. They can be extremely valuable when used responsibly, but unfortunately, understanding and using credit cards correctly can be surprisingly tricky.

How to kick-start the best financial behaviors with credit cards? Take a few minutes to review the ins and outs of credit card usage by reading the below, and consider how you can make your personal credit card habits even healthier.

Credit card state of mind

Some people fall into a type of credit card mentality which enables them to feel less connected to their money, and therefore less mindful of their spending. Using credit cards, as opposed to cash or debit cards, can make us less aware of how much money we’re spending and more likely to make impulse buys. After all, the money isn’t really being spent now – it’s all in the future. This sounds great at the time, but more relaxed spending habits can lead to seemingly sudden large bills. As a result, we might be unprepared to make the repayment, leaving us feeling out of our depth. A good way to avoid this is to review your credit card statement regularly, so you keep on top of the money you’re spending and plan accordingly.

Impulse buys and self-control

Consumers using credit cards might be more inclined to make impulse buys. When faced with the choice of making a purchase using your credit card after a difficult week, or sitting down and making a payment into your retirement fund from your pay check, we know which one is more tempting. The first choice will feel good in the moment, but could have negative consequences later. Even small purchases made on credit cards can snowball into big debts if left unchecked, so notice when you’re being tempted by an impulse buy and ask yourself – do I really need this? You can always wait 24 hours and re-evaluate then.

What is hyperbolic discounting?

When making a purchase, credit card users often feel they are getting a deal as they don’t need to make a large payment upfront. Ultimately though, they will end up paying much more for the item than if they had purchased it outright, due to the interest added. This might be necessary for certain payments, such as household appliances, but for unnecessary items it can really add up. While one large payment would seem daunting and put you off, the smaller payments make the purchase more enticing. Even when you use your credit card, you still have to make the repayments in the end, so make sure that you know how much you can spend on your credit card and still be within your means.

Being overwhelmed

Finances can be complicated and credit cards are no exception. The nature of spending on credit can create a false sense of security about payments, which in some cases leads to overspending and debt. Being in debt or dealing with other serious financial issues can sometimes lead us to develop a “devil may care” attitude toward spending, as we feel that there is simply no way to get back on track. Although it can seem insurmountable your finances are never too far gone. There are always resources and solutions to help, so don’t be afraid to seek them out.

When should I use my credit card?

When used smartly, credit cards are actually an important financial tool. They can help cover essential expenses even when you don’t have enough money readily available in your checking account. Car repairs and healthcare costs, for example, can’t always wait until your next pay check is deposited. Credit cards can also be useful for building up your credit score. When you put big-ticket items on a credit card and make your payments on time, your credit score will improve. Having a good credit score allows you to get better rates when applying for mortgages, so it’s absolutely worth having a credit card even if you have enough money to pay up front. Other benefits of credit cards include cash-back rebates on food, gas and other spending – so check in with your credit union or bank and see what cards and benefits are available.

Keeping on top of your repayments

The number one tip when using a credit card is not to forget that you will, at some point, have to repay the money you have spent on the credit card. It’s important not to lose sight of this when using your credit card so that you don’t run into issues in the future. If you do end up in a situation where you feel overwhelmed or need guidance, remember that Greenpath can help you and offers free advice for all HUECU members.