My idiotic journey with credit cards

My dark side

When I started using credit cards 💳, I had a few times when I just make that extra purchase, often talked into by people close to you 🤫 'lets get one more round', 'oh its only one more...'. The credit card makes it so easy for you to give in 🤷‍♂️. Sometimes it's even bigger purchases, like paying for a holiday. 'Put it through the card, we can cover it later'. So when I got a little freaked out by my dark side 😈, I basically dropped my credit level to a very low level, think it was around £1000, not knowing the down side of making such a move...

From one point of view, it was perfect. It's an amount that is below my monthly spending and I can safely cover each month based on my income. It was also much lower than my emergency fund amount, i.e. even if my income is affected temporarily or I accidentally miscalculated outgoings, my emergency fund could cover it within a blink of an eye. I was essentially debt free.

Application rejected?

I am not going to lie, it felt nice. It IS nice. I was running debt free! Each month, I spend up to around £800. Never going over, always clearing my bills. I thought I was winning. Not until my wife and I decided to change our credit card supplier. The previous supplier we had changed their threshold for getting perks, so we were keen to explore other providers that suit us more. We applied for an M&S credit card and guess what, my application got rejected! I was livid 😤! How can the credit card company penalise🧐 me for 'good' money/debt management.

I never over spend, I always clear my bills to zero. I have zero debt in my life, isn't that good money management? Oh how idiotic and immature I was...

Little did I know, I was basically destroying my credit score. As I lowered my credit limit, from £2500 to £1000, the significant % drop in my credit limit would have triggered a bad mark. My monthly spending got so close to my credit limit that my credit utilisation ratio (CUR) went sky-high every month (>90%)! What an idiot I was...

My change in practice

After educating myself and asking a few connections I have with the credit world, I figured my stupidity. So, with a bit of planning, I switched my strategy. This change alone has contributed to a drastic improvement in my credit score within 3 months...

The way how I do it:

Look at my average monthly spending and get an idea how much that is

Look for any regular spending that can be cut down. Budget, budget, budget.

Apply for the credit card and see what credit limit they give me.

Calculate 30% from the given credit limit by the provider and treat 30% of THAT given credit limit as my 'ACTUAL' psychological limit. 🧐

So if £2500 is my given credit limit, £750 is around my average monthly usage on that card.

When I get close to £750, I would stop using it.

My own psychological limit on my card also encourages tight spending habits and frugality.

If I want spend anymore, I use my debit card, which felt more painful, so I don't spend much.

The 'hidden' emergency fund

There was another benefit of this as well. The gap between £750 (my psychological limit) to £2500 (actual limit) was essentially unused credit (debt) that I have access to if I need it. It became a huge buffer and safety-net for any unexpected disasters (also knowing I have my separate cash emergency fund).

If any unexpected costs come up and I can't budget, work or save for it quickly, I would pay for it through my credit card and immediately clear and pay for it with my emergency fund💰. That way I gain the extra perks provided by the card for using their services e.g. points for coupons, cash back etc. Yet I would clear that amount with the emergency fund, and subsequently immediately replenish the emergency fund at the next pay day. The buffer is the bit between my own 'psychological limit' monthly spending and the high actual credit limit set by the lender/provider.

This method is pays a bit part in allowing me to sleep 😴 well at night knowing the unexpected events are covered and still improve my credit score along the way.

Taking it further

When I got comfortable with my discipline, I actually got a second credit card and repeated the process! Obviously, sometimes my own psychological credit limit (around 30% of actual credit limit) of the first credit card is actually lower than my average monthly spending, so I need another credit card for more credit. After I familiarise myself with my discipline🤓, I wanted to explore starting a second credit card, but again, ONLY using small amount of the allowed credit.

Using each card minimally, keeping credit utilisation ratios low, having emergency fire power from both cards (and I truly mean emergency only!), benefiting from the perks of a different credit card provider and resulting in high credit scores for my good behaviour! Needless to say, all these credit bills are cleared after each month.🥳

The second (and maybe even the third) credit card is not allowing my money spending to go out of control. In fact, I am only doing so with the upmost discipline with myself!

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