Budgeting and Credit Cards – The Link

Budgeting is an important aspect of personal finance especially to a household. It determines the liquidity of the household. Liquidity is the ability to meet short term requirements. In case of a shortage of cash to meet requirements, the household’s bread winner or money maker will have to resort to borrowing. The most popular of which is the credit card. Credit card is a tool to ‘bridge’ a financial gap for the household, supposedly. However, its convenience to use coupled by aggressive marketing of companies in selling their products and the usual mall sales lead to a financial challenge that is expected to mount as months go by. This situation is further aggravated by the lack of budgeting and monitoring of income and expenses. Suppose to be, a budget strain will give rise to the use of a credit card. But, in most cases, a person starts budgeting the moment credit card balances start piling up or until a collection company starts sending summons and legal notices.

These two things, budgeting and credit card, therefore, can go together providing harmony or could lead to a financial predicament. The question is: Which came first? As illustrated above, the budget should have come ahead before using a credit card to ease a financial strain. For if the budgeting is carried out well, the use of the credit card will be more prudent and justified. Budgeting shows how the money is spent prospectively compared to the income that will be generated. Hence, a neatly prepared budget projects an impending scenario of a positive financial status or a negative one. Either situation poses a concern though. Granting that the budget is followed which resulted to some extra cash on hand, the concern is what to do next? Conversely, when the expenses exceed the income, how should one deal with it? Obviously, the first scenario is preferred. Unfortunately for many, the latter scenario is more frequent. The use of credit card these days is more prevalent than when I started using one in the early 90’s. Credit card companies then were very conservative and selective. I had to make a ‘hold out deposit’ in exchange for my first credit card. Nowadays, you can choose in the variety of credit cards. Companies are lax in providing one without the necessity of requirements nor a hold out deposit. As such, the perils of financial mismanagement are magnified.

Therefore, the lesson is budgeting is a preventive tool for financial predicaments. The problem for many is that it is hard for them to sustain the practice, especially, when expenses are getting out of control. But, come to think of it, in times of difficulty, budgeting becomes more compelling. You will never realize its benefits until you are able to do a one year budget and have formed a habit in doing so. In my next article, I will introduce several ways to do budgeting.

14 thoughts on “Budgeting and Credit Cards – The Link

  1. RTF

    For many breadwinners, it is usually Income minus expenses equals savings. Ideally it should be income minus aavings equals expenses. The challenge really for many families is how to budget and how to save. Its good there is a Mr Ricky So to to help spread the importance of budgeting, saving and investing.

    Reply
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  3. varuosad

    Incredible! This blog looks exactly like my old one!
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  4. Genesis Argerich

    The use of credit card due to “unexpected financial strain” is nothing more than borrowing from a neighbor only that it involves modern technology and you get pursued in both ways (credit collecting agents and neighbors could be harsh at times :P). The best way still is to have sufficient savings because if you use credit card for lack of available cash to fund your expenses translates to being in the negative in terms of liquidity. Credit card for me is a means of safety or cashless transactions which aid most in times of travel as there are risks in carrying much cash around. Purchases online need credit cards too. Credit cards doesn’t mean that you can use them as cash (same way as debit card) when in reality you don’t have it. Expecting incoming salary in this case might be the excuse for many, however, most people aren’t mindful of expenses going in as the days and weeks progress, hence the neglect of due dates and interests charges.

    For me credit card use must only be a representation of my real cash that I have no plans of carrying around. If I buy a laptop using credit card, I should know that I have the cash (somewhere safe) and I can pay for it when due date comes without banking on an uncertain future.

    My attack on this personal finance issue is SAVE, SAVE, SAVE…

    Reply
  5. James

    Sir Ricky,

    I have a outstanding balanced of my CC around 60K, all straight payment even i pay beyond the minimum, i still got a 2,600 finance charge. So i called HSBC, someone told me to file a payment arrangement, so i sent an email request for approval to collections department, i hope they will approve it. More than a year na kasi po ako may financial crisis, well i learned my lesson na. Any advise from you is a big help and enlightenment for me, more power po!

    Reply
  6. James

    My request po pala, is to make all my account balances straight payment, change to 6 months installment. Reasonable naman po siguro yun, atleast nag report nako ng status ko, kesa naman yung iba na kakilala ko hindi na nagbayad.

    Reply
  7. Ricky So Post author

    Hi James,
    That is a good strategy to arrange a straight payment of your outstanding BUT stop using the card as much as possible. However, check out the finance charges as well. On another thought, you can consider making a balance transfer to another card and this usually carries a lighter finance charge. The goal here is to stop being charge 3.5% per month which is about 42% per annum and convert it to a lighter finance charge of about 15% to 17% which is more than half of what you usually pay.
    But, then again, the key is to eradicate the debt first and be able to control your finances. I have an article regarding that as well on the basic needs tab. I wish you well on this predicament of yours. Soon, you should start saving and investing. Have a great day!

    Reply
  8. James

    Hi Sir Ricky,

    Thanks for the response, currently as of the moment my request it is still pending for approval. Right now my OB is 45,000 . I also filed a salary loan for 30K, i have been working for 6 years and its my first time to file for a salary loan in SSS and from their website i can tick 30K so i assume im elligible to loan for this amount, but after 3 days i got a reply. Im currently reaching our HR for this. I will never stop until i wipe out all my outstanding balances, and will definitely closed this account. Im thinking of using debit card nalang po.

    “We regret to inform you that your Salary Loan Application was not approved by your employer”

    Reply

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