How to Handle a Credit Card in a Behaviourally Informed Way.

In the previous article we discussed the many pitfalls of selecting a credit card and how to select a card in a behaviourally informed way. As the Dutch say: ‘a good start if half the work’. So now with the first half of the problem solved, let’s dive into the second half: actually using the damn thing.

Let’s for argument’s sake assume that you’re now on a cheaper credit card which fits your needs as established by the previous article. If not, stop, drop and read that one first – and act accordingly. You’re on the credit card that works for you. Issue is, it can still work against you when you don’t have insight into your usage and spending. If you’ve done the cost benefit analysis, you now know what you want the credit card for. Good. Now use it for that. And only that. Credit cards are notorious for giving people a false sense of limitless money. The money is always available to you. Your money is always available to you. Nuh uh. Not your money, the bank’s money. That you will need to repay. If you decided to get a credit card for your necessary spending, simply because you know you’re going to spend this money anyway (e.g. groceries, utilities, phone/internet plan, rent, insurance) and want cashback/award points for it (contentious, I know…) that’s fine. But doing this well relies on some serious accounting. What are the costs off the aforementioned? Can you estimate them (or track them) accurately within several tens of dollars, given your past transactions? And do you know if, and by how much, you need to adjust those averages based on inflation and the general rising cost of living? If you can figure this out, you have now established your budget for the credit card. Crank the limit down to this number (or as close as you can) – credit card providers often do let you adjust the limit down. Now with your personalized credit card spending plan and associated limit, you can safely use the card. But exclusively for the things you have budgeted for. Otherwise this house of credit comes tumbling down again. The easiest way to not be tempted to spend on things other than your necessities? Leave the card at home if you’re going out (unless you’re going out to do groceries and that’s in the budget). Although I am in no position to give financial advice (and therefore refuse to do so), this seems like the least risky way to handle a credit card, to me.

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Now there are other ways of handling a credit card, but they are riskier. The one I see most prominently being used is essentially the opposite of what I just described. People have their necessary spending come out of their current account, making sure their needs are met, and use the credit card for all the fun stuff. This is a dangerous game if you don’t plan your purchases, don’t understand your own spending behaviour, are an impulse buyer or are very easily tempted. The credit card makes all these behaviours worse. So if you’re bad with impulse spending before the credit card, you’re going to be even worse when you have the credit card. Research has shown, time and time again, that people spend more using credit cards. Not only that, but they tend to underestimate how much they have already spent, overestimate how much they have left and quite frankly, have no idea what they spent the money on. This is because credit cards don’t need you to deliberate on whether you can actually afford the thing you’re about to buy. The money is available to you anyway. Now imagine this for an impulse spender. It’s very Ariana Grande: ‘I see it, I like it, I want it, I got it.’ Well, you’ve got debt, that’s for sure. If you really want to have a credit card for the ‘fun stuff’ you really need to set yourself some clear limits. You need to budget and plan and actively have the constant self-discipline to not fall into the trap of overspending. But what happens to this level of cognition once you’re drunk? Or just a bit tipsy? Or out to celebrate something and just super excited? Or had a bad week and need some retail therapy comfort? If any of these are in your ‘credit card fun budget’ but you’re being lead by your emotions, all bets are off. There’s no active thought here. There’s no deliberation and appreciation of the financial consequences of this decision. And this exactly what the credit card stimulated. I’ll be honest, I don’t think this is the best idea from a behavioural standpoint.

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Second point, or the final quarter in our case, is the repaying of the credit card. There are a couple of ways about this and I suggest you use all of them. One way to repay a credit card is to set up an automatic debit. Link it to any of your other current accounts for auto repayment and Bob’s your auntie. Now should this just be linked to the account you do al your other spending from as well? No. I’m a firm believer in having a minimum of 3 accounts to begin with: 1 for your essentials, 1 for you savings and 1 for your fun spending. In that order. The credit card isn’t an account, it’s a facilitation tool. What would this look like? Let’s assume you’ve established that you spend $4,000 per month on essentials (the aforementioned groceries, rent, etc.). That’s your credit card limit. Now that should also be the amount of money in your ‘essentials’ account, which in this case is your credit card repayment account as the credit card is used for all the essentials. All good from here. This account gets linked to the credit card via auto repayment. Done. No, not done. Although I think setting up auto repayments is a good idea, it’s only about 20% of the effort. The other 80% is manual repayments. Why would you have to still do manual repayments? To make sure you’re tracking well. If you’ve got super stable monthly costs and can 100% accurately predict them, this step may not be as relevant to you. But if some, most, or all of your costs put on the credit card are variable, well, then waiting till the end of the month may not be the best idea, as the amount in the ‘repayment’ account might not be sufficient to cover the entire credit card debt. If that happens either your ‘repayment’ account goes into overdraft (costing you an overdraft fee) or you revolve part of your credit card debt (costing you a debt fee or interest charge). Either way, not good. If your credit card expenses (groceries etc.) are highly variable I recommend you repay the credit card every single time you use it. If that’s daily, so be it. You do this manually, but also from the ‘repayment’ account you’ve set up for it. This allows you to 1. never really be in debt and 2. never spend you don’t have as you’re adhering to the limit of your ‘repayment account’ (so your actual budget) and not the limit of your credit card (in case they’re different). If you now find that at the end of the month your budgeting estimate wasn’t sufficient for the actual credit card spending, you need to re-budget or re-plan your spending. I do suggest you categorize/name all your manual repayments to make accounting easier for yourself. If you do that, you can see what you’re spending where. It’s entirely possible that once you put your groceries on a credit card you end up spending more on groceries – credit cards have been associated with impulse buying for groceries as well, no joke. Probably best in that case to move groceries to a debit card, or even cash; or to make a grocery list for every single time you enter a grocery store. In case of using the credit card for your ‘fun’ spending, the daily repayments or repay-as-you-spend repayments become even more important. Again, I don’t think this is the best idea, but it can be done. Have a separate fun account with a spending limit, adjust your credit card limit to that and go from there. Repay as you spend. When your current account is empty, the credit card stays home. The fun is done till the next pay cycle. Also, a key component here: the fun and essentials spending accounts are split, and credit is best used for only one of them. And secondly, if you’re only using credit for part of your essentials, or part of your fun, you’ll need to have a repayment account which is separate from those as well. To exemplify: if I have 1 essentials account, 1 savings account and 1 fun account, and then get a credit card to pay for some of my essentials, I now need to set up another essentials account, which is going to be the ‘essentials repayment’ account. So I now have 2 essentials accounts. In total I now have 4 bank accounts and a credit card.

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Phew, you made it to the end. In 2 articles we’ve now discussed credit card selection, spending and repayments. It’s not fun is it? As easy as it is to spend on credit, as difficult it is to actually handle them responsibly. I completely understand if after reading this you’re like: ‘no thanks!’ However, if you do want to continue using a credit card, I hope these 2 articles have given you the roadmap, or at least some handlebars, as to doing so in a behaviourally informed manner. If you have any more tips or tricks yourself, let me know!