Should you stop using credit cards while paying off credit card debt?
It’s harder to pay off credit card debt when you are still actively using the card for new purchases. By switching to a debit card to pay for new expenses, it becomes much easier to track your progress and effectively pay down debt faster.
While there are many solid reasons for using a credit card instead of a debit card (fraud protection, building your credit history, and credit card points), those benefits are only strong arguments if you are consistently paying your balance in full each month. If you are regularly incurring interest fees or are susceptible to spending more when using a credit card, the benefits of using credit cards are unlikely to outweigh the costs.
Delayed impact of credit cards
When people pay for things with cash, they tend to spend less. Paying with cash is a more tangible experience. You can clearly see that you have less money after the exchange. With a debit card, it’s not as tangible as cash, but you can still see a fairly immediate impact on your checking account balance. With a credit card, it may be another month before you get a bill for things you buy today.
Credit cards make it easy to delay the cost, impact, or consequences of our purchases. This cycle of delayed costs is often what leads people into credit card debt. If this is a cycle you’ve struggled with, it’s going to be particularly hard to pay off your debt while continuing in this delayed cycle.
Credit cards facilitate overspending
The way that many people determine if they can afford something is to look at their checking account balance. They do some quick mental math, subtracting any bills that they know are coming up, to determine what is left over to be spent on everything else. This approach is flawed for a number of reasons (our mental accounting skills are not as good as we think, we fail to factor in lots of necessary expenses, and we typically don’t proactively factor in saving for the future). But it’s especially flawed if we are looking at our checking account balance, but then spending on our credit card.
With a credit card’s delayed payment cycle, it’s harder to contextualize if you can afford something since it won’t actually impact your checking account until next month. It’s easy to optimistically assume that your future self will be in a position to cover today’s purchases. With a debit card, there are much clearer and immediate consequences if you try to spend money you don’t have (either your card is declined or you get hit with an overdraft fee).
By exclusively using debit cards for new purchases, you are immediately able to see the impact of a purchase. That immediacy provides helpful feedback, making it easier to shift your spending habits.
Progress is unclear
If you are actively spending on a credit card, the balance is constantly fluctuating. It goes up as you make new purchases, and then goes down when you make your monthly payment. Because it’s always going up and down, it’s hard to track your progress. Even if you are effectively chipping away at the debt balance, the progress doesn’t look linear. When it’s harder to track progress, it’s harder to consistently make progress.
For many people trying to pay down credit card debt, they determine how much to pay towards their card each month by looking at their checking account and deciding how much they have available. If you are exclusively paying down old debt (not actively using your card for new purchases), this is a reasonable enough approach. But for those who are still charging new expenses on the card, it often results in them feeling like they are paying a lot (as much as their checking account allows), yet their balance is still growing.
In order to make progress on your debt balance your monthly payment needs to be higher than the total of your new monthly expenses + interest charged + any fees. If you are not paying at least this much each month, your balance will go up.
If your approach to deciding what to pay is focused on what you can afford at that moment (based on your current checking account balance), you aren’t factoring your new purchases into the equation.
By switching to a debit card for new purchases, your checking account balance will paint a more accurate picture of where you stand at any given moment. It becomes easier to evaluate what you can afford. It also makes it easier to see and understand how your credit card payments impact your overall debt balances.
This also allows your credit card bill to be more consistent month to month, making it easier to plan for.
How to shift to a debit card model
If you are in a paycheck-to-paycheck cycle and are paying for most expenses on a credit card, it can be challenging to switch to primarily using your debit card. If you’re noticing that your credit card balance has been growing, the shift will be especially hard, as you are likely spending more than you are bringing in.
While it may be hard to shift, using a debit card will help ensure that you are living within your means. If you aren’t consistently spending less than you earn, you will not be able to make effective progress on your debt.
If you immediately switch to a debit card for all new purchases, you may have a hard time paying for your current cost of living AND your next credit card bill (which likely includes all of last month’s purchases). If it takes a few months to make the shift gradually, that’s ok.
Once you’ve moved all of your expenses to your debit card, your checking account will give you a more accurate snapshot of your current financial situation. It also shifts your monthly credit card payment into a more straightforward loan payment (similar to a car or student loan payment). At this point as long as you are making at least the minimum payments, you are making forward progress (unless you have an extremely high-interest rate, ie. 24% or higher).
If you are only paying the minimum amount, your progress will be slow, but at least it will consistently be in the right direction. Paying any amount above your minimum payment will help you pay the debt off that much faster.
You may still decide to use your credit card on occasion, or perhaps you forgot that your credit card was linked to an account. When that happens, make an additional payment to your card for the amount of the purchase. This way, the money is also deducted from your checking account in more or less real-time (stopping that problematic delayed payment cycle). Also, by making two payments, you keep your living expenses separate from your loan repayments. While technically you could just make one larger payment, separating it into two helps your brain recognize the difference.
If you have an emergency expense and don’t have the funds in your checking account to pay it off immediately, you still want to make 2 separate payments to your credit card. One is your regular debt payment and one is to cover at least part of your new expense. Let’s say you bought a $1,000 last-minute flight to visit a dying relative, and you don’t have that much in the monthly budget. Decide on a payment plan for yourself to pay it off. So for the next 4 months, you would make an additional credit card payment of $250. You don’t want to add more to your debt balance without a clear plan to pay it off.
Risks of Using a Debit Card
There are some legitimate benefits to using a credit card, instead of a debit card. So it is important to highlight potential downsides, or situations that may be exceptions.
Fraud Protection - Credit cards offer better fraud protection than debit cards. If you notice fraudulent charges on your credit card, you can call up the card issuer to inform them, and they will usually credit back your account, then send you a replacement card. The process is fairly easy. However, fraudulent charges on a debit card or funds are withdrawn from your account at an ATM are much harder to get back.
This is a valid argument for using credit cards instead of debit cards. However, if using credit cards consistently results in you spending money that you do not have, it’s likely that you yourself pose a higher financial risk than a potential thief. So while fraud prevention is absolutely something to be aware of, overspending prevention may be a higher priority concern.
Points - Another common argument for the use of credit cards are the points that many credit card companies award you for every dollar spent. The cashback and travel reward points are a real benefit. However, credit card companies are not handing them out because they love their customers, they give them out because they know it encourages people to spend more money.
There are many examples of people who have gamed the system and are able to take elaborate trips all thanks to credit card points, but the vast majority of customers are influenced to spend much more than the value they gain in “free points”.
There are many reasons why you may have found yourself in credit card debt, but a significant portion of people with credit card debt are people who are more susceptible to being influenced to spend. If this is a trait you can recognize in yourself, the easiest way to not be influenced by points is to stop using credit cards.
Travel Insurance - Some credit cards offer special features like travel insurance. If you book a rental car, you may have collision insurance covered if you use certain credit cards (so you don’t need to pay for it from the rental agency). Or if you book a flight with certain cards, you may get reimbursed for out-of-pocket expenses caused by flight delays or lost luggage.
If your card offers these features, this is actually a smart time to use them. Just be sure you have a plan in place for how you will pay off the expenses.
Pre-authorizations - When you check into a hotel or rent a car, they will typically pre-authorize your card. They are freezing a certain amount as a security deposit. The hotel or rental car agency wants to be sure they will get paid if you run up a large room service bill or damage the car. So they place a hold on your card, which you’ll often see as a pending charge on your card until you check out or return the car.
With a credit card, this pending charge is unlikely to impact you, unless you are near your credit limit. On a debit card, this pending charge will freeze your access to some of the money in your checking account. This may limit your ability to pay other expenses until the pending charge is released.
For this reason, using a credit card to pay for a hotel room, rental car, or any other expense that may authorize a large amount, may be a good option. Again, just be sure you have a plan for how to pay off any of these expenses.
By switching to a debit card for your daily expenses, you separate out your daily living costs and your debt repayments. Using a credit card, especially if you have a history of recurring credit card debt, makes it too easy to spend beyond your means without fully realizing it. If you are struggling to shift your spending habits, you may benefit from additional support. Schedule a call with Sarah to learn more about one-on-one coaching options.
