Unless you plan to leverage cash for the rest of your life, you need credit. If you hope to buy a new car, a new home, or even pay for your graduate degree, you need credit. You’ll need credit because you’ll need to take out a loan to pay for the car, the home, and the college education. While there isn’t much you can do to get around using credit in certain scenarios, there are some situations where you should use cash over credit.
Why credit can be dangerous
Credit is a necessary evil. You absolutely need it for some things, but it’s so easy to get that you can use it on the wrong things. Credit can make you feel like you have more money available than you really do. This is thanks to the available credit limit you are given with a credit card. Just because you have the available credit, doesn’t mean you should spend it.
In fact, using the available credit when you don’t need to is what can lead to very high amounts of debt. High amounts of debt usually means you’re paying more in interest as well. Sometimes, you just can’t escape using credit. However, there are a few key situations where you should always use cash instead. It will save you a lot of money and help you stay in budget.
Situations to use cash over credit (especially when you already have debt or can’t control your spending)
#1 – discretionary spending
Any time you want to purchase something that is not a necessity, but a “fun” purchase, you will want to use cash. Let’s say you are shopping at the mall and want to buy a new top. You have $50 in cash to use for your new top. Instead, you put it on your credit card. Now, you’ve purchased the top and put it on your credit card (which means you’ll pay it later). You also still have your $50 free in cash, and will likely find something else to buy with it. You’ve just spent more than you were supposed. This is where using a credit card can be very expensive, very fast.
#2 – other debt payments
Never pay a debt with a debt. It simply means you are going deeper and deeper into debt because you aren’t using money you have available to pay your debts. This is another situation where if you aren’t careful, you could end up doubling the total debt you have. If you can’t seem to afford your debt, call your lender and ask for a forbearance plan or updated terms. You may not get the answer you want, but it may help.
#3 – medical bills
We mentioned this one in the Avoid Using Credit on These Purchases article. For young women, medical expenses can be few and far in between. That doesn’t mean that ones that do come up should be paid for on a credit card. Depending on how your insurance works, you may be required to pay for certain expenses out of pocket. If this is the case, first use any HSA or flex-spending accounts offered to you by your employer. After that, pay for these bills directly out of your checking account. Since medical expenses can come with a hefty price tag (and even if yours doesn’t), there’s no sense in paying more in interest.
#4 – monthly expenses
At minimum, your monthly income should cover your monthly living expenses. I’m not talking about manicures and pedicures. I’m talking about bills, groceries and gas money to get to work. If you aren’t spending your money wisely, you may be putting yourself in a position to use credit to fund your normal expenses. This is a bad idea. You’ll need to start making adjustments to your budget and spending, and stop using credit to pay for things your income should be covering.
#5 – vacations
If you can’t afford a vacation, you shouldn’t take one. I know you probably don’t like the sound of that, but I’m giving you tough love! The best way to vacation is when it’s fully paid for. Putting your vacation on a credit card means you come home to the bill. All of the great memories and feelings from the actual vacation are quickly erased.
You’re now stressed out with paying off the credit card, along with all of the other things you have to deal with. The anxiety is never worth it! Instead, save up for your vacation and pay for everything in cash. The difference in experience is life-changing! This was one of the 30 money lessons I learned before turning 30.
#6 – casino visits/gambling
You may not be a casino girl, but if you ever find yourself in a position to gamble, give yourself a cash limit! Casinos allows players to take cash directly from their credit card. This is known as a cash advance. Going this route means you’re hit with a fee and you’re paying a (likely) higher interest rate. Enjoy yourself at the casino, just don’t use credit to do so.
Using credit to your advantage
How to use credit the right way
I don’t want this article to deter you from using credit. As I mentioned earlier, credit is a necessary evil. We all need it. We all just need to use it the right way. The best way to use your credit cards and build your credit history is simple. First, make sure you are starting with a clean slate (aka $0 balance). You can’t use credit the right way if you are already carrying balances.
Second, you’ll want to create a budget and understand exactly what you can afford to spend each month. Make sure your budget factors in all spending and expenses. Once you know what you can afford to spend each month, you’ll know what your limit to spend on your credit card is.
Before you start using your credit card, think about what you want to achieve with it. Do you want to travel more? Do you want cash back? Do you want points to purchase things? Whatever you want, you’ll need to find a credit card that is best suited to your liking. There are so many credit card options out there, so do your research. Once you have the card that will give you the right benefits, start using it. Make sure to always stick to your spending limit. Lastly, you’ll want to pay it in full every month. Carrying a balance and paying interest is never worth the points.
Credit has its perks
Another smart way to use your credit card is to be knowledgeable of the perks that are given to you just for being a cardholder. These perks are standard with the credit card, regardless of how much you spend. There are plenty of credit card perks to take advantage of. Make sure you read all documentation that comes with your credit card. You’ll quickly learn all of the benefits.
Related: 6 Common Debt Causes and How to Avoid Them
If you need to spend money on any of the scenarios above, make sure you are using cash over credit to do so. Avoid using credit on the situations listed to ensure you don’t put yourself into unnecessary debt. Are there certain expenses you never use debt for? How do you manage your credit card? Share your answers in the comments section below!