Thinking Different with Credit Cards

November 10, 2013 at 11:14 am Leave a comment

Soon after I been using YNAB to budget my spending, I started to handle my credit cards a little differently.

I have an American Express card that gives me cash back, and this is my “daily” card.  I use this to buy gas, meals, groceries, car repairs, etc.  In short, a majority of my spending goes through this card.  In addition, I have a Visa card that is used whenever the place I’m going doesn’t take Amex, which is only a couple times per month usually. In each case, when the bill arrived, I’d pay it off.

As I was helping a friend start using YNAB, I noticed that while he used his cards for the majority of his purchases, he paid them very differently than I did.  He would pay them down about every other day or so.

It struck me that since I’m now using a budget and only spending money that is in the budget, this method of paying made sense.  Before I started doing this, I’d end up with a $1500 – $2000 bill that would come, which I had the money to immediately pay off.  Now, the bill that comes each month is usually only a few hundred dollars, because I’m paying things down about once per week now.  One benefit of doing this is that it makes reconciliation very easy, since I’m checking my Amex account at least two or three times a week and marking off the cleared items.  If anything odd shows up, I can see it and react more quickly.

The other day, I realized another reason to pay like this.  Recently, in YNAB I created a Computer category, which I intended to spend on software and/or hardware upgrades.  It wasn’t long afterward that I had a hard drive that started giving me trouble.  I ordered a replacement (an SSD) and put that against my Computer category.  Unfortunately, that category was about $200 short.  I’ve altered that category balance to push forward to future months, so it’s treated like a debt that I’m paying off a little at a time.  Since I purchased this SSD on my “daily” card, and I’ve been paying down a portion of my new expenses every week, the bill that came in was about $525.  By the end of the month, I’ll have charged up another $1500 on the card, but since I’m paying a little each week, the balance by the time my next bill gets here will probably still be around $500.  From the view of AMEX, I’ll have already paid off the SSD, so I won’t have to pay any interest on this debt.  Next month, I’ll put $50 more into my Computer category, and aside from my weekly spending, I’ll pay an extra $50 off.  By doing this, each month, I’ll end up having paid $0 interest on that SSD purchase, even though it will take 4 months to pay off completely, as this rate.

I don’t recommend anyone to get into the habit of doing this method of paying down things over a long term.  It will only work when you have a relatively small amount per month that you are carrying forward.  Keeping track of multiple categories like this will only increase the difficulty of doing this.  This might be a nice trick to squeeze an extra couple hundred bucks out of your Christmas category, but use it wisely.

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