Debit Cards, Emergency Fund

Break The Credit Card Cycle

It has been several years since my wife and I regularly used credit cards for monthly purchases.  Instead, we use cash, debit cards, and online bill pay.  Here’s how we broke our credit card cycle –

1.  We put our credit cards in our wallets – and just left them there.  We didn’t cut them up.  We didn’t cancel them.  We didn’t put them in the freezer.  We simply made a decision not to use them on a regular basis.  Over the past six years, this has served us well.

2.  Before we started living on a budget and getting out of debt, our credit card served as our emergency fund.  If we were a few hundred dollars short at the end of the month (due to real needs and / or just wants), we would use our credit card.  The first thing we did, when getting out of debt, was establish a real emergency fund.  Obviously, no fund is big enough to cover every-single-emergency-imaginable, but we had to start somewhere.  Our goal, in those early years, was to keep between $1000 and $2000 in our emergency fund, at all times.

3.  We live on a budget and created a structure for managing our daily and monthly spending.  Click link to see yesterday’s article on this subject.

4.  We use the envelope system – which really helps to keep cash spending down, keep things organized, and promote smart shopping.  There was a time when, if I had cash in my pocket, I would spend it.  If I had $5, I would spend $5.  If I had $100, I would spend $100.  However, once I made the promise to myself that I was “done” with credit cards – I had to get serious about proper cash management.  Without the safety net of the credit card (and with no desire to constantly dip into our emergency fund) we quickly learned to be smarter with our cash.

5.  We routinely use our debit card “like” a credit card.  I use it online and I’ve even used my debit card to reserve a rental car.  A bit concerned about using our debit card for online purchases, I opened an Electric Orangeâ„  checking account from ING DIRECT.  (Right now, ING is offering a $50 bonus if you sign up for their Electric Orange checking.)  We keep a limited amount of money in the account, separate from our primary checking account, and use the Electric Orange account for all online purchases.  This works well for us – but we do have to be careful.  It’s easy to overspend when simply swiping a card or punching in those 16 digits, credit or debit.

6.  We ignore bonuses, rewards, and discounts associated with credit card use.  I’ll admit it:  It can be difficult ignoring all of the “extras” associated with credit card use.  However, for us, we would rather focus on zerothat’s the amount we owe credit card companies – than on the 5% discount or 2% cash back we might receive.  Sure, the “extras” would be nice, but we’re doing just fine.

That’s how we broke our credit card habit.  If we chose to do so, we could start using our credit cards again.  We do a much better job of managing our finances than we used to do.  I’m sure we could use them without a hitch, but we’re going to keep doing what’s been working.  Our system works just fine for us.  However, if we were to use credit cards again, we would simply use them and pay them off at the end of the month.  The focus of this article is not on abandoning credit card use, forever, but on how we broke the cycle of over-using them, and having to pay interest and fees.


6 thoughts on “Break The Credit Card Cycle

  1. I especially agree with #6. I think I read somewhere that the bonuses, free miles, etc., actually encourage people to spend more than they normally would, as they think “Oh, I’ll get more rewards by buying more things.” Even if someone pays their credit card bill in full, there’s a chance they’ve bought more things than they needed because of the perks.

  2. Megan, I definitely agree, especially with impulse items, there’s a temptation to think more about the rewards than the actual costs (long and short term…)

  3. We recently took a Dave Ramsey course, but, like you, we have not cut up our credit cards. I think they are useful tools — but they have to be used VERY carefully! The convenience is hard to give up, but we now have a rule that if you use the credit card, you have to come home, take money from the proper envelope, and put it into a “master card” envelope to pay MC at the end of the month. This system seems to be working very well for us.

  4. Hi there. Great post, many thanks.

    I do believe that on your way to financial independence it is of a paramount importance – no credit cards, no debt. There is no way around it.

  5. Admitting you have a debt problem and actually adding up the debt is a good first step. Many people don’t know what they actually owe and prefer to have their head in the sand because they know it is bad. I pulled my head out of the sand 2 1/2 years ago and realized I owed $96,000 in credit card debt. Yes, you read that right. How I got there was a long story. Some of the charges were justified, many others weren’t. I’m happy to say that I have paid down $43,000 and I’m determined to get rid of the rest. My spending habits have changed dramatically and I’m lucky to have a good job. Once the balances are paid off, i will never use them again. I read everything I come across on budgeting and reducing debt. The credit card articles are my personal favorite. For those of you who have too much debt, add it up and start paying it down. It may take you years like me but it will be worth it in the end.

  6. Hi,
    I agree with you that but you should think for using credit card again because there are a lot of facilities comes day by day for credit card holders,you can enquire about it,thanks.

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