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How to Use Credit Cards to Manage Your Budget

March 9, 2015
Credit Card Basics, Credit Cards
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We are big fans of credit cards, but we admit that it’s easy to overspend if you aren’t careful. But your favorite piece of plastic can be a fantastic budgeting tool if you keep tabs on your spending with regular check-ins or self-imposed monthly spending limits.

Why you should use credit cards to manage your budget

Using a credit card to budget is a good idea for several reasons. Responsible credit card use can help you build good credit. And if you have a rewards credit card, you can net cash back or travel rewards on every purchase. Plus, many cards allow you to track your purchases by spending category, which makes it easy to keep track of where your money is going.

Track what you spend, then set a budget

Before you can budget, you need to know how much you’re spending. This is easy to track with a credit card. Many cards allow you to organize your transactions by type, such as groceries, restaurants or clothing. For a larger snapshot of your spending habits, check out your card’s year-end summary for last year’s spending.

If your card doesn’t allow you to sort transactions, you can also use a budgeting software to track spending. Make sure your transactions are categorized correctly; it’s common to have miscategorizations until the software gets used to your spending habits.

Once you figure out how much you’re spending, you can decide whether you want to create a stricter budget. Either way, you can use your credit card to manage your budget by either tracking your spending on a weekly or monthly basis or setting a monthly spending limit that you don’t exceed.

» MORE: Why nearly every purchase should be on a credit card

Review your transactions weekly or monthly

If you operate on a weekly or monthly budget, check your purchase activity and card statements at least as often to stay on track. Each week or month, have a specific day when your total up your purchases in each category to ensure you’re staying within your self-imposed budget.

The more frequently you go through your transactions, the easier it will be to make sure you don’t go over what you can afford to pay off each month. For instance, if you went $50 over budget during the first week of the month, you know you need to adjust your budget by $50 sometime during the remaining three weeks.

Set a monthly spending limit

For an easier way to stay on budget, set a monthly spending limit. For instance, if you’ve budgeted your daily expenses — like groceries, gas, clothing and more — at $1,000 total, keep your monthly credit card balance below this amount. This is great for flexible budgeters who are more concerned with the bottom line than the specifics.

If you go this route, it’s a good idea to check your overall spending at least once a week to ensure you’re on track. So if your monthly limit is $1,000 and you hit $600 on the 15th of the month, you need to keep your remaining monthly spending at $400 or less. And, of course, adjust your monthly spending limit as necessary when you have irregular expenditures, like your six-month car insurance premium or annual vacation.

Erin El Issa is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @Erin_Lindsay17 and on Google+.

Image via iStock.