- March 15, 2021
- Posted by General Electric Credit Union
- 5 read
How You Can Take Control of Credit Card Expenses
If you’re on a quest to improve your financial health, it’s important to start by steering clear of poor money habits, especially those related to credit card usage. Despite best efforts, you may find yourself overspending on any number of items and struggling to pay down a credit card balance. Identifying there is an issue, familiarizing yourself with best practices, and taking steps to remedy the issue will all help you rebuild your finances.
Understand credit utilization rate
While you can’t spend more than your line of credit, you shouldn’t be getting close to reaching it, either. Maxing out your credit card signals to lenders you have more debt than you can handle. To determine this, they look at both your debt-to-income ratio and your credit utilization rate. The credit utilization rate looks at your total revolving debt (AKA how much you owe across all the cards you have) divided by the amount of revolving credit available. If a credit card has a credit limit of $3,000 and you make $500 worth of charges to the card, your credit utilization rate is 16%.
Typically, it is best to keep your credit utilization rate below 30%. This shows lenders you are not dependent on the line of credit, and helps you keep balances manageable.
- Tip: Learn more about credit utilization rate and how to improve your credit score with General Electric Credit Union's (GECU) free, downloadable eBook The Ultimate Beginner's Guide to Credit Scores.
Identify poor money habits
In addition to your credit utilization rate, there are other ways to identify if there are bad habits needing to be addressed. Start by asking yourself some questions: Do you track your spending? Are you in the habit of paying for purchases with a credit card? How often do you find yourself making purchases on social media or through online retail sites? How often do you turn to “retail therapy” when you’re feeling stressed, then end up with more credit card debt than you can manage? Be honest with yourself — recognizing poor spending behaviors enables you to tackle them head-on and make needed changes.
Americans spend nearly $18,000 a year on nonessential items on average — or nearly $50 a day.1 Nonessential spending leaves less money to put toward essential items, such as making mortgage or rent payments, reducing credit card debt, paying off student loans, or setting aside money for retirement.
1. Set up a budget
Setting and following a monthly budget will help you stay on track and regain a sense of control.
- Evaluate income and expenses.
- Determine percentage of income available for reducing credit card debts.
- Identify overspending and reduce expenses.
Budget for debt management expenses and contribute a consistent payment amount toward debt reduction.
One budget model you can use is the 50/30/20 rule. 50% of your take-home pay goes toward needs, such as: housing, utilities, groceries, insurance, and outstanding debts. 30% goes toward wants or discretionary spending — it can include anything you want so long as you stay within the percentage. 20% goes toward savings, such as: vacation, housing, emergency fund, college plan, or retirement.
2. Make a list
Before you set out to go shopping, whether for groceries, clothes, or anything else, make a list of the items you need. This can help you differentiate between necessary buys and items you simply want. If you need something enough that you put it on the list, get it! But if something you spot at the store just appeals to you in the moment, maybe skip it this time around.
3. Avoid impulse purchases
Whether you're looking to buy a new TV or a new pair of shoes, take a second to contemplate and ask yourself these questions: Is this item a need or a want? If it's a want, can you truly afford it? What is the true cost? Will making this purchase prevent you from depositing money in your savings account? Will it mean you're going to rack up more credit card debt? If the answer to any of these questions causes you to rethink the purchase, consider holding off for now.
4. Resist discounted items
While savings are always tempting, don't buy something simply because it's on sale. Stick to purchasing items you actually need.
5. Make purchases with cash
Research shows buying with cash causes more psychological pain than paying with plastic. Therefore, people who pay with cash tend to spend less than people who pay with credit or debit cards.2 Furthermore, leaving your credit and debit cards at home and shopping only with cash can curb impulse spending.
6. Review memberships and subscriptions costs
Sit down and check your monthly statements to determine whether you really need those streaming or subscription services, or whether you can comfortably cancel them. If you’re not using them, don’t keep them just for the sake of keeping them; it’s money you could be saving for another day.
If you find yourself overspending on a monthly basis, the first step is to acknowledge the problem. From there, you can enlist simple steps like the ones provided above to set yourself on a better financial path. General Electric Credit Union is your trusted source for Cincinnati banking. Credit union members enrolled in mobile or Online Banking have access to GECU’s Money Management tool, which pulls in your account information and makes creating a budget a walk in the park.