Staying dedicated to maintaining a strong budget is the best way to prevent this from happening.  Knowing where your money is coming from and where it’s going to each month will help you understand where you may be using credit to supplement income – without even realizing it!  To keep a healthy financial position, credit should be used to pay for things already in your budget.  This way, you know that you’ll have the money to repay it when you receive your credit statement.

Here are some signs that you may be inadvertently kick-starting the credit cycle:

  •  You find yourself making impulse purchases (buying something without first consulting your budget)

  •  You are making less than full balance due to your credit card each month (i.e. making only minimum payments)

  •  You pay for “big ticket” items on credit (furniture, vacations, etc.)

Many forms of consumer credit (credit cards, lines of credit, etc) have high interest rates and once you start the interest cycle it can be hard to find your way out of it.

Sometimes things can happen like a medical emergency or vehicle repair, which are “financial emergencies”.  A strong budget can help ensure that you have your own cash cushion available in savings for such an emergency.  When this is not available, we understandably use credit to pay for these emergencies.

If using credit in a financial emergency, you will need to look ahead in your budget to see where you can repay these costs as quickly as possible.  To do this, you may need to reduce some expenses or find a way to increase income in the coming months.  Regardless, you must have a plan to deal with that debt.  The longer it takes you to repay it, the more it will cost and the harder it will be to get out of it as the interest continues to build.

Once you’ve got your budget and you’re using credit effectively with it, you can start using credit to your financial benefit!  The better your credit rating is, the more options you’ll have for credit products – including ones that pay rewards for usage.  If you can earn rewards for things you are spending money on anyways then it is a true benefit to you.  Just make sure to continue using credit for those items and don’t get tricked into buying “luxury” items you wouldn’t have bought just for a few extra rewards points.

By doing this, you will effectively start “winning” the game of credit that has been designed for us all.  If you ignore your budget the credit game will certainly win and you’ll risk starting down a path that could leave you in a very difficult spot, financially.

So to ensure credit contributes to your financial health, make sure to: 

  •  Create a budget and stick to it.

  •  Use credit to pay for things that are already in your budget.

  •  Make a plan to pay down any credit you’ve had to take on unexpectedly.

  •  Enjoy a healthier credit lifestyle!