How to Budget Using a Credit Card

Cheerful latin american woman relaxing at home on a shopping spree online holding her credit card very happy

When you're putting some or all of your purchases on a credit card each month, it may seem complicated to properly work those into your budget. But budgeting using a credit card can help you track your spending, earn rewards and even pay off other types of debt using cash back.

Incorporating credit cards into your budgeting strategy will require regularly checking your spending and doing your best to avoid carrying a balance. There are lots of apps and online credit card issuer features, though, that will help you do just that.

Here's how to budget with credit cards while making use of the perks they provide.

Strategies for Budgeting Using a Credit Card

No matter which budgeting method you use—and we'll offer a few suggestions below—your credit cards can be a powerful tool for financing purchases over a period of time. Just be sure to keep interest costs in mind and make all your payments on time.

Also, be wary that relying on credit cards can encourage overspending. If you have a history of making charges you can't pay off within a few months, it may be best to limit the number of purchases you make with credit.

When using credit for everyday spending, it's ideal to pay off your balance each month; if you can't, aim to carry a balance of no more than 30% of your credit limit. That will limit the negative impact of credit utilization on your credit score.

Pros and Cons of Budgeting With a Credit Card

To get the most out of a credit card, it's important to be vigilant about your credit card spending. With that in mind, there are several advantages to using a credit card as part of your budgeting plan:

  • Track purchases on your statement or in your issuer's app. Credit cards can make expense tracking automatic. Many issuers offer the option to see a breakdown of your monthly spending by category, and checking your daily and weekly spending is much easier with a credit card than noting each purchase by hand or in a spreadsheet. You can put all of your everyday spending on one card so it's easy to see any patterns, or you can assign different credit cards different jobs based on the rewards they offer.
  • Set spending maximums. Since you can check your balance often on a credit card issuer's app or website, it's easy to see when you're approaching a self-imposed spending limit. The trick is not to let your spending get too close to your limit regularly, though, since that could negatively affect your credit scores. For the sake of your scores, consider calculating 30% of your credit limit on the card and making that your max spending limit. Your credit balances affect your credit utilization rate, which is an important factor in your credit scores. Keeping your rate below 30% will help prevent credit score harm, but the lower your rate, the better.
  • Make use of credit card rewards. Another good way to incorporate credit cards into your budget is to use credit only for certain purchases based on reward options. You can make use of multiple cards with different rewards rates to maximize your points or cash back. Selecting the right card for the right purchase may seem like a bit of work, but with the effort, you could reap hundreds of dollars in rewards. The first step is picking cards that match your spending habits, such as a dining/grocery card, travel card, everyday spending card and even retail card, such as a Target or Walmart card. Using cards for the wrong purchases could leave rewards on the table. For example, if you used an everyday card that offers 1% cash back on travel spending to book $5,000 on flights and a hotel, you could lose out on $200 in rewards with a card that gives 5% cash back for travel.
  • Credit cards can help you build credit. Making on-time payments on a credit card can show lenders and credit scoring models that you know how to responsibly manage debt. A long history of on-time credit card payments can help increase your credit scores and make it easier to qualify for new credit, including car loans and mortgages. If you don't plan on using your credit card to make day-to-day purchases, consider at least using it regularly for small purchases you can pay off right away.

Using credit cards to budget also has drawbacks:

  • You could have high credit utilization. As mentioned above, it's important to keep an eye on how much of your credit limit you're using—on each card and across all cards—at any particular time. When you put a lot of charges on your card, even if you plan to pay them all off at the end of the month, you'll be able to keep your credit utilization low by making more than one payment to your balance each month. That can also help prevent your balance from ballooning so large that it becomes overwhelming.
  • Carrying a balance can make expense tracking tricky. Let's say you make a purchase in March and don't pay it off until April. You can decide to include it in your budget for either March or April, but it may be easiest to leave it listed under your March expenses so that your spending behavior each month is as clear as possible. Furthermore, carrying a balance can throw your budget for future months out of whack if you don't properly plan for it.

How to Use Your Credit Card With Specific Budgeting Methods

Your credit card can have a place in any budgeting strategy you choose. Here's how it can fit into three popular methods:

  • 50/30/20 budget: This strategy suggests spending 50% or less of your take-home income on essentials, no more than 30% on nonessentials, and 20% or more on savings and debt payoff. You can use your credit card to pay for all nonessentials, for instance, and set 30% of your take-home income as your monthly credit card spending limit. You can also opt to get any cash back you earn as a deposit directly in your checking account, if your issuer allows for that, and put that money toward debt payoff.
  • Zero-based budget: A more time-intensive strategy, zero-based budgeting requires you to assign each dollar you earn to a category, including savings, so that nothing is left unaccounted for. With more detailed categories in place, you can decide to use credit cards just for certain types of purchases, perhaps tied to rewards categories you're likely to collect a lot of points or cash back in.
  • Envelope budget: Traditionally, the envelope system requires users to give themselves spending limits in various categories and then place that amount in cash in dedicated physical envelopes. You can now use this system digitally via various apps. You can give yourself a credit card purchase budget, and assign yourself a limit for what you'll pay with credit that month—either by writing that amount on a physical envelope or listing it as a line item in an app. Or you can use the physical envelope system only for certain budget categories and credit cards for other categories.

While budgeting can be a bit more challenging when you regularly use a credit card for purchases, finding a strategy and sticking with it can help you keep your expenses on track—and help you get extra value on a regular basis with your credit card's travel rewards, cash back and other benefits.