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3 Essential Rules for Using Credit Cards Without Going into Debt

By Priya

March 6, 2020

It’s a common misconception that anyone who uses a credit card is living under a mountain of debt. The average credit card debt in Australia in 2019 was $3,264. While a lot of people struggle with credit card debt, it doesn’t mean that a credit card can’t work for anybody. If managed properly, you can successfully use a credit card and avoid going into debt.

Can you use a credit card without going into debt?

I pay for almost all expenses using my credit card. Every single one, except rent. Since rent is paid to a bank account, a credit card would consider this as a cash advance. It would attract a 22% charge. 

There are two main reasons why I use my credit card. It has no fees, including no foreign currency translation fees. It also uses the real-time exchange rate for purchases in foreign currencies. This makes it cheaper to use while travelling overseas or for buying online internationally. 

The other reason I use a credit card is because it allows me to delay paying for almost everything until the end of the month. That means all the money I spend gets extra time to sit in my bank account earning interest. It’s not a fortune by any means, but it’s a few dollars of free money just for waiting.

While my card doesn’t have a points or rewards system, many others do. A lot of people use credit cards to take advantage of these points, especially for travelling.

Should you use a credit card?

This all sounds great, but let me say upfront that if you have a debt problem you should not be using a credit card. I’ve come up with three essential rules for using credit cards without accumulating debt. The same would apply to ‘buy now, pay later’ services like AfterPay.

If you’re not able to abide by these three rules, then you shouldn’t be using a credit card – it’s as simple as that. Otherwise, you run the risk of getting stuck in a cycle of debt that becomes harder and harder to break. It becomes harder to achieve financial freedom.

3 rules for managing a credit card without building debt

1: Pay on time every month and in full

You should only use a credit card if you can pay it off on time every month and in full. Making just the minimum payments isn’t enough. If you’re not able to do this, you should avoid using a credit card, because you’ll inevitably accumulate a lot of debt.

Credit card companies aren’t doing you a favour by giving you credit. They’re allowing you to borrow money, and borrowing that money comes at a cost. That cost is interest. It’s how the credit card companies make money off you. 

When paying the minimum amount on a credit card, you’re usually only paying a very small portion of your actual debt. The majority of your payment goes towards interest. It goes towards paying the credit card company for the service of borrowing money, as opposed to paying back the money you actually borrowed. 

This essentially just keeps your debt alive so that credit card companies can continue making money off you through your interest payments. And if they’re making money off your debt, they don’t want you to pay it off anytime soon. 

The way to completely avoid this is to pay off your credit card in full by the due date. At that point, you’ve repaid the money you’ve borrowed, so they can’t charge you interest for it. 

You should also be paying off your credit card on time to avoid being charged late fees. This is often as simple as a reminder in your budget calendar. 

How I manage my credit card

I pay off my credit card in full a few days before it’s due at the end of the month. This allows time for my payment to clear so I can start the next month with a $0 balance. I have my credit card payment noted as a bill in my budget calendar. 

Managing my payments this way allows me to use my credit card but still avoid accumulating debt, being charged interest or attracting late fees.

2: Your credit limit should only be what you can afford to pay in full

The credit limit on my first credit card was $6,000. This is significantly higher than what I usually spend in a month. It’s also significantly higher than my salary which means it’s more than I can comfortably afford to pay off every month. I knew this was dangerous. It could lead to uncontrolled spending that I couldn’t afford. So, I took the initiative to cut my credit limit in half. Make sure your credit card spending is within the boundaries of what you can afford to pay off in full every single month.

Credit limits and your credit score

I’ve heard information floating around that credit scores are improved by maintaining a credit utilisation rate of under 30%. This means that using less than 30% of your credit limit is good for your credit score.

I’m not sure how true this argument is but I’m not convinced that it’s a good way to manage your finances and stay out of debt. Many people take this advice to increase their credit limits 70% above what they can afford, to make it appear that they’re only using 30%. It would mean my $3,000 credit limit increases to $10,000.

I can’t stress enough how dangerous this is. All it takes is one month of uncontrolled spending or not keeping an eye on your credit card balance to end up in $10,000 of debt. You would then be charged staggering amounts of interest on that debt. That will damage your credit score more than anything. 

Your credit limit should be restricted to what you can comfortably afford to pay off in full and on time every single month. This is dependent on your budget and your finances. How much of your credit limit you then use is up to you.

3: Credit cards should never be used to bridge the gap

There’s a difference between relying on a credit card and using a credit card.  Unless it’s literally a life or death situation, or a question of survival, a credit card should never be used to bridge the gap between what something costs and what you can afford to pay. 

Emergency funds

Some people say they have a credit card only for emergencies. But here’s the thing: a credit card is not an emergency fund. It’s a ball and chain that can drag you into financial ruin when you’re at your most vulnerable. You should avoid turning to a credit card in emergencies otherwise you risk accumulating more debt.

To make sure you can financially manage emergencies, you need to save up a robust emergency fund. In fact, I strongly believe it should be the first financial goal you focus on. 

My emergency fund is my lifeline. It gives me peace of mind knowing that I can financially handle any emergencies and still work towards my other financial goals.

Having an emergency fund means you don’t have to rely on a credit card for emergencies. Start by saving up an emergency fund that’s the same amount as your credit limit. 

Living expenses

Similarly, your essential living expenses should never be reliant on credit cards either. If they are, you either have an income problem or an expense problem. Focus on closing this gap as soon as you can to break the debt cycle. Start by cutting as many costs as you can, then focus on increasing your income. 

Everything else

To put it bluntly – if you can’t afford to pay for it without going into debt, then you can’t afford it. Everything that isn’t a question of life or death, or survival falls into this category. 

These are things that aren’t essential like streaming services, eating out, fun spending, new technology, travel, home decor and expensive clothes. And, yes, that includes big Christmas and birthday celebrations as well.

A credit card doesn’t entitle you to buy the non-essential things you can’t afford. If you treat it like it does, then the price you’ll pay is a mountain of credit card debt. You can’t avoid credit card debt if you believe that a credit card entitles you to buy whatever you want. Whenever you buy something, especially something expensive, you should consider these 10 costs before purchasing.

There is nothing in this life, including financial freedom, that comes without sacrifice. You either need to go without these non-essentials or save up to afford them without a credit card. Using a credit card to bridge the gap is not an option if you want financial freedom.

Depending on your budget and your finances, saving money might involve cutting costs or earning more income. That means giving up some non-essential expenses, taking on a second job or starting a weekend hustle. 

You may not like it but that’s the sacrifice that it’ll take. Ask yourself how much you want it. Is the sacrifice worth it?


If you can’t abide by these rules, then you shouldn’t be using a credit card. Credit cards should always be paid on time and in full every month. Your credit limit should never be more than you can afford to pay off in a single payment. You should never rely on credit cards to bridge the gap between what things cost and what you can afford. Learning to manage your money without relying on a credit card will help you break the debt cycle on your journey to financial freedom.

Priya

About the author

Hi, I’m Priya! I’m a Chartered Accountant and the creator of Paper Money Co. Life is too short to be constantly worried about money. I want my life to be more than just going to work to pay the bills. Join me as I strive to live a life I love on a budget I can afford (and without going broke)! Are you ready?

  • This is a great article! Definitely highlights all the right ways to use a credit card in the day to day and how to tell if you’re not using it the way it’s intended. I know for me personally I always aspire to use my credit card correctly but I don’t seem to be quite able to pull it off… womp womp.

    For all the reasons you’ve listed above, I have accepted that I am not one of those people who can consistently budget with a credit card. It does inspire me to read about people who can and I’m proud I’ve learned my limitations and don’t keep repeating the same mistakes, haha!

    Thanks for the great read!

    • Thanks Kerri! You’re absolutely right – budgeting should be about working to your own strengths and accepting your limitations. There’s no rule anywhere that says you have to use a credit card!

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