Editorial Policy

Expert Q&A: When Should You Use Credit?

Erica Sandberg

June 16, 2011

QDear Credit Guide,
Can you give me a break down on when and where I’m supposed to use a credit card? Emergencies only? What about little things like McDonald’s? It sounds crazy, but I really don’t know when you’re supposed to use it! Barry

ADear Barry,

These are sane, not mad, questions! And I’m going to have you answer them. How? First, by completing a brief exercise. So grab a pen, some paper and a calculator.

1. Write down the amount of money you earn on a monthly basis, after taxes, retirement contributions and everything else is deducted from your paycheck.

2. Make a detailed list of what you regularly spend money on in a month. Include things like rent, groceries, utilities, vehicle payments and insurance premiums. Add in an amount for savings. 10 percent of a net income is a standard figure to use. Therefore, if you bring in $3,000 per month, tucking away $300 is a wise goal. Ask Erica

3. List the types of costs that come up every once in a while, such as clothes, gifts and expected vacations. These are your periodic expenses. Divide each by the number of months you have before paying for them. For example, if you know that you take an annual trip to see your parents every December and it costs about $1,000, divide that sum by 12 — which equals $83 per month. Include that figure on the list and deposit that amount into a savings account.

4. Total all of your expenses and subtract them from your income. You should come out even, if not ahead. If you don’t, either pare down your spending or increase your income until you do.

You’ve just developed a comprehensive budget, which will be your guide to a debt-free, perfectly prepared financial life. When your spending always fits within your earnings, you’ll never have unpayable consumer debt to deal with, no matter where you use the credit cards. Because, after all, plastic is simply a tool. As long as you have sufficient cash in the bank to cover anticipated costs, it won’t matter if you charge a simple meal of fast food or an elaborate fine dining experience.

What about those unplanned-for emergency expenses, though? These could be anything from bailing an old, troubled college roommate from jail to losing your job and not having enough cash to pay your bills. Should the cost of such extraordinary crisis situations be put on the credit card?

Well, no. A lot of people do, of course, but usually at their peril. While it can feel like a solution at the time, the liability it leaves you with is stressful and expensive. If you pay the minimum and roll the balance over for the next month, interest kicks in and the debt increases. More, the payment you’ll have to cough up the following month will be added to an already strained budget.

This is why including adequate savings and insurance to your plan is so vital. When a truly off-the-wall problem erupts, you can assume control: Access the money you’ve set aside, tap into your coverage and reduce expenses to the bare minimum until you get back on your feet. Do so and chances are high you’ll sail through without having to borrow — at least for a good long time. Too many people turn to plastic in a panic, and later regret it.

Just charge when you desire the convenience of plastic and want the consumer protection it offers. If you make just a few purchases with the cards a month, pay the balance in full and before the due date, you’ll also build a positive credit history. Sound reasonable?