Credit cards are certainly one of the most amazingly useful financial tools. The option of buying something today and paying back over time is quite wonderful. There are even some beautiful-looking credit cards designed specifically for people with money and status.

It is important however to remember always that credit cards come with a significant number of potential pitfalls as well. The operative phrase is “handle with great care”. The real life-style benefits really need to be balanced with the objectives of prudent personal financial planning and savings.

One of the most important traps to avoid is the temptation to overspend. Many studies have shown that consumers spend substantially more when they are paying with credit cards than when paying with cash. It seems just irresistible to buy that beautiful fashion item or have the delicious dinner at a lovely restaurant at the end of the week – and pay a bit later.

This danger can be avoided by setting a personal spending limit for your credit card based on your financial budget and sticking rigorously to that limit. Ideally budgeting for a credit card payment is like driving forward while looking in the rear-view mirror. Budgeting really should happen before a purchase not after. Good stewardship means being proactive, not reactive.

The other important aspect to bear in mind is the fact that very high interest rates charged by banks can make it so much harder to pay off outstanding balances. When a credit card payment is made that money goes not just to stuff already consumed but also over time on paying interest often up to over 21%!

The answer is to pay your balance in full each month to avoid paying any interest on purchases. Set a personal spending limit with your credit card, even if it is below your credit limit, based on how much you can afford to pay each month. If you can’t pay in full, pay as much as you can each month with the objective of bringing your balance to zero.

The implications of not following these guidelines can be really serious. The more that is borrowed, the larger the debt. This can lead to a myriad of other problems and not all of them financial. Debt can often lead to stress, depression and other health issues.

Tracking your spending is a foundation of a healthy financial life. Using credit cards, especially if several cards are used, complicates monitoring expenditure. Ideally, all expenditure should be tracked manually in a spending journal or spreadsheet. Personal finance software are also available such as Mint or Quicken to help track spending.

Another way to avoid the problems associated with credit cards is simply not to use them! A debit card will allow you to buy anything you wish directly or on-line but will, by definition, not allow you to overspend. It will greatly assist your financial planning. You can keep your credit card for only paying items such as aircraft tickets or a laptop where you can spread the impact of the cost over two or three months with the intention of paying down the balance over that period. This can sometimes help to smooth expenses. 

Very good luck with your financial planning and saving programs!