Credit cards can be a great tool. They’re convenient, help build your credit history, and come with benefits like cashback and travel rewards. For all their virtues, however, credit cards can come with a big downside when they’re not used wisely. They can tempt us to spend more than we normally would and things can quickly spiral out of control before we even realize.
So how do you know when it’s time to put your credit card down? Here are a few moments when you might want to ditch the plastic and reach for cold hard cash instead.
1. When you’re consistently overspending
The golden rule of personal finance: spend less than you earn. If you’re constantly finding yourself in the red at the end of the month, it’s time to ditch your credit card. Cards can be used as a crutch to smooth liquidity issues month to month without you even really realizing it.
Cutting spending and avoiding your credit cards may be difficult at first, but it’s time for a reset. Take a hard look at your spending over the past two to three months. Identify specific areas you can cut back on or even cut out altogether. Cancel the gym membership you never use, downgrade your cable & internet service, vow to bring your lunch to work every day.
Don’t settle for telling yourself simply to spend less with no concrete way to get there.
2. When you’re carrying a balance
Credit cards usually come along with a grace period, or a short window between the date you make a purchase until the payment is actually due. During this time, no interest charges accumulate, which is exactly why credit cards can be such a great tool. Make a purchase, benefit from credit card perks, and pay no financing charges as long as you pay your bill in full by the due date. However, this grace period disappears when you’re carrying a balance on your credit card month to month.
So if you’re carrying a balance, the moment you swipe for your morning coffee, the interest clock starts ticking. Sure, the interest on a $4 cup of coffee alone isn’t going to bankrupt you, but credit card debt is the personal finance version of death by a thousand cuts. When you don’t pay off your card in full each month, the interest continues to compound daily, not only on the purchases you’ve already made but on all future purchases. This should be enough to make you think twice about using plastic over cash.
Credit card debt is the personal finance version of death by a thousand cuts
3. When your balance exceeds 30% of your limit
One of the biggest factors that affects your credit score, other than your payment history, is something called credit utilization. Utilization is all about how much of your available credit that you actually use. Ideally, lenders like to see you using less than 30% of your limit, which means that if you have a credit card with a $10,000 limit, it’s best to keep your balance below $3,000. The higher your utilization, the more of a negative effect it will have on your credit score.
If your current credit card balance is already over 30% of your limit or you’re nearing that number, avoid using your card when possible. Your credit score will play a big role in not only buying a home or a car, but also renting an apartment, finding a job, or even dating (believe it or not).
When your current credit card balance is over or near 30% of your limit, put your credit card down.
4. When you’re in the mood to spend without thinking first
Impulse spending, retail therapy, or whatever else you want to call it — it happens. We all have those times when we are in the mood to spend or in the type of situation when our money just seems to flow a little bit more freely (shopping trip after drunk brunch anyone?)
Take a moment to try and resist the urge to spend just for the sake of spending. If that’s not going to work, try using cash to reign things in a bit more. When we use a credit card, the purchase seems all the less concrete since swiping a piece of plastic doesn’t have the same feel as forking over a $100 bill. Set yourself up for success by planning for these splurges within reason and stopping by the ATM.
Take a moment to try and resist the urge to spend just for the sake of spending.
If you find yourself in need of a break from your credit cards, don’t panic. Simply leave your card at home, put it in a drawer, or if you’re one for extremes, take the age old advice of freezing it in a block of ice. There’s no need to cancel your card altogether — that won’t do your credit score any favors. And who knows? You may want to get back together once you’re feeling a bit more in control.