We PF bloggers are pretty much focused on getting out of debt and staying out of debt. And since most were launched on this quest by various misadventures with credit cards, a degree of gun-shyness is understandable. Matter of fact, presented with a pitch that credit cards are good for you, most of us would laugh, gag, or weep.

However . . .

I’d like to advance the outrageous proposition that once you have your debt paid off and your spending habits reined in, the credit card can be useful tool. Not only that, it’s a valuable asset.

Useful because . . .

1. • Charging purchases provides you a paper trail that documents your spending, indispensable for budgeting and also for proving your point in an income tax audit.
   

1. • A charge card simplifies business, travel, and online transactions and speeds you through check-out lines.
   

1. • A charge card offers a layer of protection, since the lender often will back you up during a dispute, and it’s easier to return goods if you’ve charged them than if you paid with a check.
   

1. • Timing a credit card billing cycle right can allow you to defer payment for purchases until after two paychecks hit your checking account, ensuring that you have plenty in your account to cover the bill.
   

1. • Using a charge card gives you a little float, so that if you keep the money budgeted to pay each month’s charges in an interest-bearing account, you can earn a few shekels while you await the bill.
   

An asset because . . .

1. • A consistent record of on-time payments, month after month, builds a strong credit history and jacks up your credit rating.
   

1. • Credit cards are safer to use than cash and than debit cards.
   

1. • Cash-back and other reward cards give you a de facto rebate on your purchases, helping you to pay down other debt or bolster savings. The $530 I got back from American Express last month, for example, went straight into my Roth IRA, thank you very much.
   

1. • By budgeting a specific amount, per billing cycle, to spend on credit-card purchases, you actually can use the credit card as a tool to help yourself stay on budget and maybe even come in under budget.
   

So, how does this work?

First off, get all your credit card bills paid in full. Don’t try this until you’re completely, totally, altogether out of credit-card debt. The first key to success is to start each billing cycle with a balance of 0.

Next, limit the number of cards you have. Restrict your charge cards to only those that charge no annual fee. The interest rate is irrelevant, because you will never run a tab and so never pay finance charges. And make them rewards cards. You need at least one card that gives you cash back. If you like to travel, airline miles are a good kick-back, too, assuming the lender doesn’t pull any funny business with them.

I have just two credit cards: American Express and Visa. If every merchant accepted American Express, which has a generous cash-back policy, I would carry only one card. If you can get a Visa or MasterCard with a good rewards system and if you don’t buy gas at Costco (which accepts only AMEX), then that probably is the card you should carry.

Now, what you are going to do is budget a certain amount per billing cycle for purchases made on the charge card.

Determine what items you feel comfortable charging and estimate the amount you pay every 30 days on these items. Add them up: that’s your per-cycle budget. In my case, I charge everything but recurring utility and insurance bills (which are paid with automatic transfers) and visits from repairmen who accept checks only. By way of racking up rewards, I charge everything else: groceries, gasoline, yard stuff, household junk, the vet, the hair stylist...you name it. In a given month, the max I can pay for these costs is about $1,500, and so that’s what I budget.

Open an interest-bearing account at your bank or credit union. I use a money market checking account at a credit union, which pays a little interest. Check into arrangements at online banks such as ING: you’re looking for an interest-bearing account with no fees, on which your can write checks or make electronic transfers to your credit-card issuer. You can get away with a money market account because you will make only one or two debits a month.

Calculate the amount per paycheck you will need to transfer into this account to cover your per-cycle budget. Each time you get paid, immediately transfer that amount electronically. This will ensure that when the bill comes in, the account will cover what you’ve charged.

For example, I budget $1,500 per cycle for charges on AMEX and Visa. My paychecks are deposited to an ordinary checking account. Each payday, I transfer $750 from regular checking to money market checking, thereby funding my credit-card budget. The rest of my paycheck stays in the regular checking account, where it is consumed by automatic payments to the utility companies and insurance companies.

It’s absolutely crucial to stay within your credit-card budget! Never, ever charge more on the card than you have in the bank at the time you make the charge. If you ever run over month’s budget, stop charging immediately!

I accomplish this with weekly budgeting: breaking the credit-card cycle into four roughly week-long chunks and allotting one-fourth of the $1,500 to each “week.” Interestingly, this has had the effect of keeping my expenditures well under $1,500 a month. The first couple of months after I started the system, I just broke even or overspent by a few dollars. In that case—if you spend more than the amount you budgeted—you will have to raid savings to pay the bill, an aversive measure if ever there was one.

Tracking your budget on a weekly basis allows you to see when you’re going over budget, so that you can cut back before it’s too late. Here, for example, is how I’m doing this month:

Whatever remains in the account where you hold funds budgeted for credit-card spending can either be rolled over into a mutual fund or other savings instrument that pays better interest, or just sit there to act as a cushion.  In January, I came in $338.28 under budget; after I paid my February credit-card bills, the amount remaining in my pocket had risen to $449.35. Hot diggety!

Admittedly, this system calls for a great deal of self-discipline. But in many ways it actually builds self-discipline, because it is itself a mechanism for keeping track of what you spend, knowing when to stop spending, and seeing exactly where your money goes. And after a year, you get a reward for practicing that self-discipline.

All of these things are good for you.

budgeting, credit cards