I've told people I pay my credit card bills in full every month, but recently I realized I was telling a lie. Sure, I pay the balance that's due each month, but I noticed I still have a remaining balance on my card. When I pay my monthly balance, I am not paying for all the money I spent in the past month...I'm paying for stuff from last month.
On one hand this is nice because it gives a buffer of time before I need to pay for those purchases. If I pay the balance off in time, essentially, those purchases are interest free for an additional month. But this convenience has another implication: being 1 month behind, I am becoming more disconnected to my purchases.
Studies often claim people who use credit cards will spend more money than they would have with cash. One reason that's often stated is that people have access to more funds than they do with cash. They feel more powerful and capable than they do with cash, and I think it's because people become disconnected with their spending.
When you pick up your credit card, you may see a beautiful landscape scene, your initials or even a picture of your dog, (all made possible with personalized credit card designs...). But what you don't see is your balance. Compare that to looking in to your wallet, where you see exactly how much money you have on hand. You are connected to your money because you can see it and you can feel it. Looking at a credit card doesn't tell you a thing related to your budget. The fact is, you could have absolutely no money and still have a credit card in your hands. It's quite deceiving, really.
When I saw that paying my credit card meant paying last months bill, I realized it's another effort by the credit card companies for consumers to become even more disconnected with their purchases. I don't feel as accountable for my purchases because I'm not immediately paying them off. By next month, I won't remember what I bought anyway, I'm just paying a balance.
Auto-pay is even worse. If you have your credit cards all set on auto-pay, you might completely forget what you spent your money on, and you don't even have to look and face your purchase history.
Here are some tips on how to avoid this credit card disconnection.
1. Cancel auto-pay.
2. Every month LOOK at your purchases on your credit card bill.
3. Pay your current month's balance.
Get connected with your finances, otherwise you'll lose a grasp on where your money is going. And trust me, that's not a good path to go down.