Use a Credit Card or Separate Bank Account for Budgeting

Use a credit card to help you with your budgeting. Well, this does not look like the best idea in the world and for a reason. We usually associate credit card with extravagance and splurging. How can such a product be part of the budgeting solution?

It can be, if used the right way. Why?

Because most of us never really get a firm grip on how much we spend every month. While this may seem a simple exercise, this is quite complicated. Your expenses will change every month. A few expenses will not have a monthly frequency. Common examples are insurance premium payments, kids’ school fee payments, birthday celebrations and travel. Unless you know the breakup of your cash outflow, how will you know if the extra expense in a particular month is due to a non-monthly expense or you just let your wallet loose. And if you don’t know that, how would you budget for the coming months? Just the awareness about how much you spend each month can help you cut down a few unwarranted expenses. It will help prevent leakages.

And if you pay from different bank accounts/credit cards or use cash, you will never be able to keep track of your expenses. Analyzing the expenses at the end of the month will become an onerous task.

Now, this is where using a credit card with discipline can help take care of this problem.

How Can a Credit Card Help in Budgeting?

If you use a credit card, you can simply use your card for all the expenses and get an itemised bill at the end of the month. Use the card for utility payments, grocery payments, online and offline payments. Don’t use credit cards for rent payments since there is an extra overhead involved.

You can just look at the statement at the end of the month and analyze your expense patterns. I concede the expense description in the credit card statement is not always clear and you may have to jog your memory for those items to make sense. But this exercise can help, especially if you think you are spending more than you should or are clueless where your money is going.

Moreover, you get a single number that you can now focus on. If this final number is too big, you can dig deeper and find out areas of improvements.

If you are not comfortable entering credit card PIN so many times, you can enable on-tap purchases on your credit card. Now, the banks allow you to set up monthly credit limits (overall and for different modes of payments such as online, on-tap and swipes) and even per-transaction limits. While credit card frauds cannot be completely eliminated, if you use this feature smartly, it will not only reduce the chances of card fraud and also the financial impact of such frauds.

This will help assuage some concerns about credit card frauds.

Credit Card Is Not Accepted Everywhere

Yes, this is a problem. What if a shop does not accept credit cards? Or you may go to places that may accept only cash. Or UPI may not work on a day and you must use cash. Or you may not be comfortable using your credit card at all places. What do you do then? This problem has a very simple workaround.

Open a new bank account. Or designate an existing bank account solely for expenses.

At the start of the month, transfer a fixed amount from your primary bank account to this bank account. Make all the expenses from this bank account. Make sure of the following:

  1. Use only this bank account with cash withdrawals.
  2. Use this bank account for all UPI payments.
  3. Pay all the credit card bills from this account.

If you want to tighten your budget a bit, you can simply transfer a slightly lower amount every month and see how it goes. For instance, if you have been transferring Rs 60,000 per month to this account, transfer only Rs 55,000 to this account next month. If you are able to manage with Rs 55,000, Voila! You just saved Rs 5,000 for the month.

A Credit Card May Have Other Benefits

You may argue you can do the same things with a debit card too. However, the problem with debit cards is that debit directly happens in your primary account. Now, your primary account may have a few non-discretionary payments such as home loan EMIs or a few one-off items such as transferring money to a friend/family. Plus, you would want to leave some comfort cash in the bank account. If you were using your primary bank account for regular expenses, you could easily breach into that comfort cash and use when needed. Tracking becomes difficult.

But yes, you could use a debit card from your “new” or “designated” account for this purpose. Despite this, I think a credit card has a few additional advantages over a debit card.

  • If you use your credit card regularly and with discipline, it will help you in building your credit score. A good credit score will help if you have plans to borrow in the future. A health credit profile can help improve not just the access to credit but also the cost of credit.
  • The banks are more generous with discount and cashback offers on credit cards than on net banking and debit card spends. With a credit card, you get reward points too, but reward points accounting is unreliable unless you are using Amazon Pay ICICI Pay or Flipkart Axis Credit card.
  • The banks may also offers attractive credit schemes on credit cards. For instance, no-cost EMIs are more likely on credit cards than on debit cards.

Do you use a credit card for budgeting? If yes, do share your experience in the comments section.

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