How to Avoid Overspending with a Credit Card

Point of Interest: Overspending with a Credit Card

Fending off the pitfalls of credit card overspending stems as much from emotion as it does from logic. While you may have read or heard the advice on misusing credit cards, ¬†sometimes temptation gets the best of you — or necessity demands a quick solution.¬†

It’s an easy thing to overspend with a credit card if you’re not careful. Credit card mismanagement can result in significant problems, including a drop in your credit score and major debt.

Efficient ways of spending with a credit card

While irresponsible use of a credit card can cause crippling financial circumstances, careful use of credit cards can be a useful tool for lifting the burden of big expenses.

For starters, you don’t have to be overwhelmed by double-digit interest rate charges if you play your cards right (pun intended). Scheduling planned expenses around a low APR is an effective way to avoid overspending. For unplanned expenses, a zero-financing credit card program might be a good option for you. 

Some card issuers also offer no-interest financing for 12 months or more when you open a new account which can help you sidestep interest expense if you don’t carry a balance each month. 

Using a card to pay for recurring monthly expenses like rent or utilities is a good way to build credit, which could help you qualify for better loan or credit offers in the future. 

With a rewards card, you can earn cash back or points that can be redeemed for travel or gift cards. Since you regularly pay these bills anyway, you might as well get a kickback.

Inefficient ways of spending with a credit card

It’s a snap to make unnecessary purchases with a credit card. Whether you’re making one large purchase or tons of small purchases here and there, it’s equally simple to swipe and worry about it later. 

You may be especially tempted to overspend if you get a credit line increase for paying your bill on time or having a higher income. On one hand, it’s a good thing because an increase helps your credit utilization ratio, which boosts your FICO score. 

On the other hand, being excessive impulse purchases may trigger late payments, an unmanageable balance and a corresponding blow to your credit profile.

Another unhelpful way of utilizing your credit card is continuing to use it after making a balance transfer. If the finance charges on one card are eating away at your budget, it’s fine to transfer a balance to a program with a zero-interest intro offer. 

If you clear the balance from the first card and continue using it, rather than just paying down the credit debt on the second card, you’ll be right back where you started.

The risks involved in overspending with a credit card

Overspending with a credit card can negatively impact your life from many angles. From a numbers perspective, you will have to choose between making timely payments on a card and other bills. 

You may also have to go without some luxury purchases, such as dining out or a weekend getaway. If you don’t cut back and pay merely the minimum on the card, you’ll carry that balance and pay interest much longer than you should or must. 

Along with crimping your lifestyle, overspending takes an emotional toll. When you have a large credit card balance hanging over your head, it can also affect your personal and business mindset. 

The financial consequences of overspending with a credit card

If you amass huge card balances that approach or exceed your overall credit lines, it’s a clear sign to potential lenders that you’re not using debt responsibly. If money is tight one month, odds are high that you may pay late on a card or not be able to pay at all.

When you couple maximum credit utilization ratios with late or delinquent payments on credit cards, your FICO score will quickly plummet. At that point, you can say goodbye to securing low rates on automobile financing or a mortgage, if you’re in that market. A single late payment won’t crush your creditworthiness but a series of them will — as will lingering debt balances that you can’t reduce.

Ways to guard against overspending

While no one suggests that you should be a minimalist, one of the ways to practically examine overspending is to evaluate your existing possessions. Look in your closet or storage spaces, and determine the last time you used a particular item or wore those shoes. If it’s been more than six months, it’s a sign that you don’t need to buy anything similar in the future.

Pair that exercise with some more practicality to monitor the inflow and outflow of your cash. A personal or household budgeting app allows you to create a fiscal plan, set spending parameters and receive alerts if you’re close to exceeding those limits. This will help you get a better idea of where exactly your money is going.

The final word

In your mind, you know the right move is to make timely payments and carry a small balance or none at all. If you stick to that plan and not be swayed emotionally, your credit score and financial stability will be ensured.

Thom Tracy

Personal Finance Contributor

Thom Tracy is a personal finance writer from Scranton, PA with 28 years of experience in the insurance, employee benefits and financial services industries. He has been a contributor to QuickBooks and Investopedia, and likes to cook, hike, and discover new music in his spare time.