Credit cards come with steep interest rates, will add up to a mountain of debt if not managed carefully, and can set you up for a lot of stress when an unexpected emergency hits. Many people get into the habit of relying on their cards because every month it feels like their income slips through their fingers too quickly. Between rent or mortgage payments, bills and groceries, they’re tapped out and need their cards to make it through until payday. However, instead of being a slave to your credit cards to make ends meet, here’s how to switch over to better money management strategies to get a handle on your money and debt.
If you’re turning to your credit card to hold you over but you’re trying to break the cycle, here are key tips to keep the plastic – and the accumulating debt – at bay.
Create a Budget
We know we sound like a broken record when it comes to budgeting and tracking your spending, but these two habits are the cornerstone of getting you out of debt and away from using your credit cards.
Take stock of all your sources of monthly income – this is how much money you’ll have to work with to pay for expenses like mortgage or rent, bills, transportation, groceries, and other costs. You need to put aside a portion of your monthly income to pay off your debts too.
When you have a balanced budget, you’ll know precisely how much money you can spend on groceries, eating out, entertainment, and shopping each month. If an expense doesn’t fit into your budget, you can’t buy it – especially not with credit.
If creating a budget seems daunting, try a budget calculator or even enlist our help. We have certified Credit Counsellors who have helped thousands of clients build and maintain budgets that fit life’s demands. We’re happy to help you too, especially if you need an emergency budget to get through the coronavirus crisis.
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Track your Spending
Whether you use a free app, keep a notebook in your purse or pocket, or log purchases on an Excel spreadsheet, you’ll need to track your expenses meticulously. If you’re halfway through the month but you’ve already blown through three-quarters of what you’ve earmarked for eating out, you’re going to have to ration the rest to last the rest of the month.
Gone are the days of turning to your credit cards to fill the gaps. You’re now carving out a new habit of paying attention to your daily spending – you may learn that a $40 weekly budget for groceries means you’ll need to pack lunches during the work week and treat yourself to a lunch with co-workers on Fridays only. Don’t think of this as a downside.
As you track your spending, you’ll see red flags and how quickly you get to the point where you’re spending more than you earn. When you earmark your money for certain expenses and spending activities, you’re choosing how you want to spend your money so that you can reach your financial goals. It’s the only way you’ll get to where you want to be financially.
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Hide Your Credit Cards From Yourself
Creating a budget and tracking your spending are easy – it’s adhering to these plans and removing the option to tap or swipe away your troubles that’s the tricky part. The best-case scenario is to remove the temptation altogether. Take an “out of sight, out of mind” approach and physically remove your credit cards from your wallet so they’re out of easy reach.
Hide them in the back of a sock drawer, between mattresses on your bed, or even freeze them in a block of ice in your freezer if you’re worried you’ll try to uncover them in a stitch. Some people lock their cards away in their safety deposit boxes at the bank.
You can also leave them in the care of a loved one, such as a parent or your partner. Ask them to hold onto your card for you – in safe keeping – for a few months. Within a few months, you’ll have gotten used to living within your means and sticking to your budget and you’ll see you managed just fine without using a credit card.
Remove the Tech Traces of Your Cards
These days, apps such as Uber, Deliveroo and Just Eat, and online shopping from Amazon Prime to eBay have made it incredibly easy to spend invisible money. With a single tap we can have anything we desire delivered to our doorsteps without actually feeling the cash slip from our fingers. It’s no wonder we all face some sticker shock when our credit card statements arrive.
While you’ve kept your credit cards physically stowed away, you need to remove all digital traces of your credit cards too. This means deleting your payment information on all your apps and favourite online stores. If you want to buy something, you’ll have to use your debit card or PayPal, tied directly to your bank account, to make purchases so you aren’t spending money you don’t have.
Go on a Cash-Only Diet
We talked about how we don’t feel the money slipping from our fingers when we tap away our purchases – cash-only diets are a great wake-up call to your spending because you physically see the money exchange and feel the drain on your wallet. For anyone experiencing a COVID-19 cash crunch, sticking with cash is your best strategy as you ask your lenders for help to get by.
With your budget in tow, withdraw cash from your bank account and allocate a certain amount to a separate envelope to mirror what you budgeted for each category. For example, you may have allocated $250 for groceries for the month. Place the amount, based on your pay cheque cycle, in an envelope. If you’re paid bi-weekly, this would mean putting $125 in the envelope each pay day. Every time you make a purchase, pay for it with the cash and in its place, add a receipt so you’ll know where the money went. Cash-only diets help with tracking your expenses too because you’ll have a clear paper trail.
You’ll pay closer attention to how much money you have left when you can peek into each envelope. If you’ve spent the cash allocated for one envelope, you can use cash from another envelope, but you’ll have to make sacrifices in that category to boost spending in the other.
This is what budgeting, spending within your means, and staying away from credit cards is all about. Each of these habits help you gain a better understanding of what you can afford each month.
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Plastic Surgery – Cut Your Credit Cards Up
If you’re seriously tempted to resort to old ways and add to your debts, cut your credit cards up. This may seem like an extreme step, but for some people it’s the only way they’ll stop spending on credit.
You can also close your accounts, but you need to do this very strategically. Closing credit card accounts too quickly can hurt your credit score and skew your credit utilization ratio, or how much credit you’re using compared to how much credit is available to you. For example, if you’ve paid off and closed one account for $5,000, but you have another fully maxed out account for $5,000, this doesn’t reflect well on your credit score. You also don’t want to sink your score by closing an account that still has a balance owing.
Consolidate Your Debts and Cancel Credit Cards You Don’t Need
If you want to walk away from owning one too many credit cards, consolidate your debts onto a single card or two, or even seek out a debt repayment plan or debt consolidation loan.
This way, you’ll have moved all your debts or payments onto a single, easier-to-manage account, and you can close these other accounts, removing the temptation for extra available credit. This is a great debt relief option if you feel overwhelmed with too many accounts to manage.
Take a look at your accounts to find the one card with the lowest interest rate and look into shifting your debts onto this card through a balance transfer. Consider the terms carefully though, as once the balance transfer period of low interest expires, credit cards have a high interest rate.
Consolidating with credit cards is tricky and can be costly. There are other, less costly ways to consolidate debt and one of our Credit Counsellors would be happy to explain different options to you and give you suggestions based on your specific situation.
Create a Financial Cushion to Replace Credit
Countless consumers end up in debt because of an emergency that forces them to rely on their credit cards to make ends meet. Maybe it’s a job loss – like with COVID-19, a medical emergency, or a leaky roof that sends household finances into a tailspin.
Brace yourself for life’s ups and downs with an emergency savings fund. If it means auto-transferring $10 a month to a savings fund, this extra cash will come in handy when you need it most. This way, when you’re in a bind, you won’t need your credit card to cover unforeseen expenses, or you’ll at least have some cash to put towards the emergency before you reach into your credit to pay for the rest.
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Consider the Full Consequences of Credit Card Debt
The consequences of credit card debt go beyond staying stuck in debt forever. Minimum payments are not designed to pay credit cards off quickly. Study your statements closely and let the sticker shock sink in. If that’s not enough to dissuade you from spending on credit, take a look at the line on your statement that tells you how long it would take to pay the card off if you only made minimum payments – and that’s only if you don’t use the card until it’s paid off.
Credit cards will get you through in a pinch, but long term, they will keep you in debt and stop you from achieving other goals.
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Stop Using Your Credit Card as Your Lifeline – We’re Here to Help
Living without a credit card is unrealistic for many people, but not using it as a lifeline is essential if you don’t want to be stuck in debt forever. If you’ve tried breaking up with your credit card and just can’t do it on your own, or if COVID-19 has hit you hard and you don’t know which way to turn, we’re here to help. Our Credit Counsellors are experts at helping people get control of their debt, even when times are tough. They’ll give you the guidance and information you need to set yourself straight as quickly as possible. Give us a call, send us an email, or chat with us anonymously online. You’ll sleep better knowing you’ve got a plan.
