How to Make a Debt-Free Switch to Cashless Payments

Tracking your spending, using prepaid cards and setting low credit limits can help you avoid debt when you switch to using more digital payment methods.
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Written by Kimberly Palmer
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How to Make a Debt-Free Switch to Cashless Payments

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Before the pandemic, Steffen Kaplan, a social media and visual consultant in the New York area, preferred using cash to credit cards. He says cash helped him avoid overspending.

But now, with the coronavirus still potentially lurking around every corner, his habits have changed.

“I don’t carry cash around with me anymore,” Kaplan says. “Given that we have to remember to wear a mask, not touch anything, and go home and wash our hands every two minutes, it just seems easier to have a credit card rather than be fumbling around with cash,” he adds.

Like Kaplan, more Americans are shifting to digital payments amid the pandemic. Among small to medium-sized businesses that accept debit and credit card payments, almost half reported an increase in customers using or asking for contactless payments, according to a June 2020 report from the Electronic Transactions Association, an industry group, and The Strawhecker Group, an analytics and consulting firm.

But for some consumers, contactless payments also come with added overspending risks. “When you are used to a cash-based spending system, it’s extremely easy to overspend when you don’t physically ‘see’ yourself spending the money,” says Eric Simonson, certified financial planner and owner of Minneapolis-based firm Abundo Wealth.

If you’re increasingly turning to digital payments because of the pandemic but you also want to make sure to avoid debt, here are some strategies.

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Try to pay off your credit card balance each month

Paying off your credit card balance each month isn’t always possible. In fact, among those who carry a balance, the average for households is around $6,124, as of June 2020, according to NerdWallet research.

But avoiding such rotating balances is a good goal because credit card debt is so expensive.

“It’s important for those making a transition to credit cards to understand the Sisyphean challenge of getting out of credit card debt,” says Sam Boyd, a certified financial planner and senior vice president of Capital Asset Management Group, a financial planning firm, citing the generally high interest rates on credit cards. They're typically 16% or higher.

Treat your credit card like a debit card, and try not to charge more than you can afford to fully pay off in one billing cycle. One way to guard against it is to pay off purchases immediately after you make them, rather than waiting until the end of the month and having to pay one lump sum.

Give yourself limits

Simonson suggests setting a low credit limit on your credit card if you’re worried about overspending. “Set your credit limit for just above what you normally spend each month on groceries,” he advises.

The downside to doing that is that using more than 30% of your credit limit can hurt your credit score, and it also means you can’t rely on the card in an emergency if you need to purchase more than normal. But the strategy does help keep you from overspending.

He also notes that many credit card companies offer a service where you can be texted as you are approaching your credit limit. “It’s a good idea to turn this on if you are new to using a credit card, to keep track of where you are with your spending throughout the month,” he says.

Jodie Kelley, CEO of the Electronic Transactions Association, says consumers can also stick with debit cards or prepaid cards. They can upload them onto smartphones and use contactless payment methods while still avoiding the risks of credit cards.

Review your spending regularly

AnnaMarie Mock, a CFP based in Wayne, New Jersey, says there’s nothing wrong with primarily using credit cards as long as you are aware of your spending. “Regularly monitoring and comparing your actual purchases with your budget is critical to identifying any areas where you may be unknowingly overspending,” she says.

Monitoring can be done through apps that track transactions, through your account’s web portal, or with pen and paper. “Find a method that works for you,” she urges.

Kaplan does that by carefully tracking all of his receipts. “If I come home with anything I bought, [my wife] reminds me or I remember that receipts go right on the desk and then she logs them. There has to be a system in place,” he says, “or you risk being surprised by an extra $200 on your credit card bill.”

If it helps, keep using cash

David Tente, executive director at the ATM Industry Association, says cash is made out of fabric so it tends to transmit viruses and bacteria less than plastic or metal credit cards.

“It’s nothing to worry about, as long as you wash your hands,” Tente says.

For some people, he says, cash is a good budgeting tool because “you can’t spend what you don’t have. Once you run out of cash, that’s the end of spending for the month.”

When you’re using credit cards, on the other hand, you can keep spending up to your credit limit — but then you’re on the hook to pay it back.

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