If you’ve got credit card debt, chances are you’re making this huge mistake. But don’t worry — fixing it will go a LONG way toward helping you turn your finances around.
What is it?
Simply put, it’s thinking of credit card debt as a bill.
Why you should never make this mistake
It’s pretty common for people to have a line item (or multiple line items) in their budget called “credit cards”.
But credit cards are not an bill to be budgeted for. Instead, credit cards are a method of payment.
Let me say that again, because it’s super important. Credit cards are not a bill to be budgeted for. They’re a method of payment.
Can you imagine having “cash” or “debit card” as an expense? It sounds silly when you put it that way, doesn’t it?
Worst of all, listing “credit cards” as an expense is not remotely helpful. In fact, doing so hurts you.
Thinking of credit card debt as a bill makes managing your money harder
Unfortunately, I see budgets all the time with things like “Credit cards $200″ listed as a line item. Budgeting that way makes it difficult to track what you’re actually buying, and easy to mask areas where cutbacks might be possible. (If only you know where your money was going.)
Because it’s what you’re buying that matters, not the method of payment you’re using to buy it.
When you know what you’re actually doing with your money (vs just knowing that you charged a lot on the credit card last month) you can make different choices.
Knowing what you’re doing with your money makes a difference
When you pay attention to the choices you’re making instead of wondering what you bought, things change.
You can choose to only spend money you already have, and to only buy things that you actually get value from.
In other words, you can create a budget that works for your life. (And actually have the money to do and buy those things!)
Considering credit cards an expense makes budgeting harder
Confusing credit cards with an expense makes it difficult when people try to create a budget.
They plan on a certain amount for various expenses, and then a certain amount for their credit card payment. Then they charge things to their card, and wonder why their credit card minimum payment is more than they’d planned on.
It’s better to budget for the things you’re buying, regardless of how you pay for those items.
Quit using credit cards altogether, and things get even easier.
Why quit the cards?
When you’re working on paying off credit cards, the easiest thing to do is to stop using the cards altogether. Period.
You may even want to cancel them.
I know, you can get rewards by using credit cards. You can also end up paying a ton of interest, more than cancelling out any rewards.
It may surprise you to know that I’m not unilaterally against credit cards. I use them all the time — now that I absolutely, ALWAYS pay them off in full before they are due.
But I didn’t use them at all for many years, because I couldn’t seem to do that without going into debt. A ton of people can’t.
If you’re in credit card debt right now, that means YOU are one of the many people who can’t handle using credit cards. (Sorry, but that’s an easy way to tell.)
Don’t feel ashamed, but do stop using them (at least temporarily) if your goals is to get out of debt.
Make credit cards a temporary line item
While you’re paying off the cards, I’d suggest creating a temporary line item in your budget that says “Credit Card Debt” — a line item that you use to indicate the payments you’re sending to that debt to pay for the things you’ve already bought in the past.
Things you may not even remember at this point.
Once you’ve paid them off, you can eliminate that credit card debt line item entirely. For good. (Whether or not you decide to use a credit card in the future.)
It won’t need to be there any longer, because once you’ve paid them off, you’ll be doing your budgeting based only on the things you’re currently spending your money on.
And credit card debt won’t be one of them.