While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.
It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.
Why Use Credit Cards?
Although credit cards can have downsides — especially when someone tends to overspend — they also offer benefits that you can’t get when you pay with other methods. This includes:
• Fraud protection: It can be easier to dispute charges and fraudulent activity on a credit card as opposed to a debit card or cash.
• Opportunity to improve your credit score: When a credit card is used responsibly, it can positively impact a person’s credit score.
• Credit card rewards: Credit cards often come with perks like travel points or cash back.
• Travel insurance: Some credit cards offer specialty protection benefits like travel insurance.
Why Is Budgeting Important?
Whether using a bank account or credit card, a monthly budget is an essential part of financial wellness. Budgeting can:
• Help to reach financial goals, such as establishing an emergency fund or saving for a downpayment for a home.
• Alleviate financial anxiety that can come from uncertainties around finance.
• Improve credit history through a record of on-time payments and responsible spending.
At first glance, budgeting may seem like a limiting factor, but it actually allows you to spend guilt-free. When budgeters know how much they can spend on certain categories each month and adhere to those guidelines, they don’t have to worry about overspending.
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Specific Budgeting Methods You Can Work With
There’s no one-size-fits-all budgeting method. However, here are some popular methods that you might consider trying if you’re interested in creating a personal budget.
The Zero-Sum Budget
In a zero-sum budget, every dollar is “spent” or has a job. However, that doesn’t mean an account should be $0 at the end of the month. Instead, it means that every dollar earned should be allocated to a specific category, with no money left unassigned by the end of the month.
Each time an after-tax paycheck comes in, a zero-dollar budget will assign it to a category, starting with necessities like rent, food, student loan payments, and insurance. The rest goes toward discretionary spending or saving.
Zero-sum budgeting means taking a critical look at each dollar entering a bank account, which can feel frustrating for some but helpful for others.
The Spreadsheet Budget
A spreadsheet or line-item budget groups spending and purchases into categories balanced against monthly post-tax income. In its most basic form, the spreadsheet budget is a list of expenses, shown line by line and grouped by type. Income covers expenses, with surpluses going toward additional savings or debt payoff.
The Online Budget
Apps and other digital tools make budgeting as easy as creating a log-in and connecting existing accounts to track spending. You can also set up budgets for upcoming purchases.
An online tool can be helpful for those who feel intimidated by budgeting prep or prefer a more passive look at spending.
11 Tips for Budgeting With a Credit Card
Using a credit card to budget isn’t so different from a traditional budget. Keep these 11 tips in mind when building a credit card budget.
1. Determine Your Monthly Income
To figure out take-home pay each month, budgeters can consult their bank account or look at paystubs from their employer (typically through an online portal). If your income varies each month, take the average income over the past year to get a rough ballpark figure.
2. Pick a Budgeting Method
A person can’t budget with a credit card if they don’t have a budgeting method in mind. Consider one of the aforementioned methods or an alternative like the 50/30/20 budget, where you allocate 50% of your budget to needs, 30% to wants, and the remaining 20% to savings.
3. Track Your Spending
Some budgeting methods are specific about how spending should be tracked. However, you can easily track your spending with pen and paper, a spreadsheet, or a spending app. No matter the method, it’s important to track each purchase.
4. Categorize Your Spending
When it comes to how to budget credit card payments, it helps to look back at your spending first. Gather financial statements from credit cards and bank accounts for the past month. Break each transaction into a category, such as needs, wants, savings, or something more specific.
With an idea of historical spending, now’s time to put a plan into place moving forward.
5. Create a Plan
Armed with a structure and an understanding of your past spending, now comes the time to plan for the future. When creating a plan, consider:
• Recurring expenses
• Savings goals
• Debt repayment goals
• Annual subscription costs
• Emergency savings needs
6. Pay Yourself First
A top priority when budgeting with a credit card should be paying yourself first. When money hits a bank account, it should go toward personal savings goals, emergency savings, or an accelerated debt repayment plan.
It’s important to prioritize paying yourself first, as many try to budget with the reverse in mind, only setting aside what’s left over at the end of the month. This approach can lead to falling short on savings goals.
7. Calculate Your Expenses
After setting aside money for savings, it’s time to break down the remaining income into monthly expenses. This includes necessities like rent or mortgage payments and wants like dining out or entertainment.
If monthly income can’t cover all of the anticipated expenses, it may be time to cut back on spending. Is there slack in the budget from underused subscriptions? Or can grocery spending go down?
Figuring this out before you swipe can help you to avoid overspending on credit cards.
8. Plan for Debts
The difference between credit card budgeting and traditional budgeting comes when the credit card bill is due. If someone has been primarily spending on a credit card, it’s unlikely they’ll see their bank account change most of the month. However, that changes when the bill comes due.
With each transaction on the card, the budgeter should have enough money in their check or savings to cover the cost. Planning for this debt means avoiding the scramble that sometimes comes with a credit card due date.
9. Simplify Your Billing Schedule
Missing a credit card bill can harm a credit score and add financial stress to a person’s budget. Mark credit card due dates on the calendar each month, and consider paying the bill early or breaking it into multiple payments throughout the month.
10. Use Rewards as a Bonus
The benefit of budgeting with a credit card comes from the various credit card rewards you can earn. Remember to cash in on cash back perks every few months for a discounted bill or redeem the travel miles you’ve earned for an upcoming trip.
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11. Avoid Carrying a Balance
Carrying a balance on a credit card could indicate an imbalanced budget due to how credit cards work. When a credit card bill isn’t paid in full, the remaining balance can accrue interest, leading to a ballooning balance that becomes harder to pay.
That’s why upfront planning is essential to budgeting with a credit card. Without a plan in place, there’s a bigger risk of overspending, which can snowball into credit card debt. If you’re using a credit card, it’s important to stick to one of the most important credit card rules of always trying to pay off your balance in full.
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Pros and Cons of Budgeting With a Credit Card
There are benefits and drawbacks to credit card budgeting, including:
|Opportunity to earn credit card rewards and cash back from spending||Possible to more easily go over budget with a higher credit limit|
|Improved credit score with responsible spending||Exceeding budget could mean incurring interest charges and additional debt|
|Option to set up account alerts to better stay on top of account spending||Potential to harm credit score with missed or late payments|
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There are advantages of budgeting with a credit card, such as earning rewards, gaining access to credit card perks like travel insurance, and improving your credit score if you use your card responsibly. By setting up a credit card budget, you can better prevent yourself from spending more than you can afford and ending up owing interest when you can’t pay off your statement balance in full.
If you’re looking for a credit card to start budgeting with, consider the SoFi credit card. SoFi cardholders earn up to 3% cash back when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1 Plus, you can earn even more when you set up direct deposit with SoFi.
The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1
How can I manage my budget with credit cards?
Budgeting with a credit card isn’t different from budgeting without one. The key to budgeting credit cards is not to spend more on a credit card than you can afford to pay off at the end of the month.
Should I budget with a credit card?
If someone can stick to a traditional budget, then budgeting with a credit card might make sense. The difference is remembering to stay up to date with payments, as missing a credit card payment can negatively impact a credit score.
How much of a hold does the budget put on your credit card?
Budget should have a pretty serious hold on a credit card. When people can’t pay their credit card bill in full, they’ll incur interest charges, which can cause them to fall into debt over time and potentially drag down their credit score.
How do credit cards affect my personal budget?
If a budgeter isn’t paying attention when using a credit card, it’s easy to overspend. This can result in putting more on a credit card than you have available in cash to pay it off. As a result, you may end up paying more than the sticker price for your purchases due to interest, leaving you less money leftover for your other needs and savings goals.
Photo credit: iStock/Mirel Kipioro
1See Rewards Details at SoFi.com/card/rewards.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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New and existing Checking and Savings members who have not previously enrolled in direct deposit with SoFi are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 25-day period. Cash bonus will be based on the total amount of direct deposit. The Program will be available through 12/31/23. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.
SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
1Members earn 2 rewards points for every dollar spent on eligible purchases. If you elect to redeem points for cash deposited into your SoFi Checking or Savings account, SoFi Money® account, or fractional shares in your SoFi Active Invest account, or as a payment to your SoFi Personal, Private Student, or Student Loan Refinance, your points will redeem at a rate of 1 cent per every point. If you elect to redeem points as a statement credit to your SoFi Credit Card account, your points will redeem at a rate of 0.5 cents per every point. For more details please visit SoFi.com/card/rewards. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.