Are you riding the credit card float?

Every time I explain the credit card float to people, I feel like I’m breaking bad news to them. It’s not fun, but it is an important concept to understand, so I’m going to take some time here and explain it.

When you charge on a credit card, you’re given a grace period to pay things off. It’s usually around 25 days.  As long as you pay it in full within that time frame, you are not charged interest.  Many people take advantage of this.  They charge this month, then pay it off next month.

First, let’s be clear:  That’s debt.  It’s debt from the second you charge on the card.

It’s like a library book.  If I go to the library and borrow a book, they’ll say, “No problem, take the book!  Just make sure you get it back to us in two weeks.” I have to return it.  It’s not my book.  Even if I plan to bring it back tomorrow, that doesn’t make it my book today.  I may have possession, but that doesn’t give me ownership:  there’s a difference.

Keep that in mind.  Now, let’s step back for a second and talk about what YNAB recommends when it comes to cash flow.

We teach people to live on the money they made last month, so they’re a month ahead. (Rule Four)  That’s the goal.  That’s nirvana.  It works like this: Money comes in, then you budget those dollars.  Then you spend, letting the budget guide your spending decisions.

People who are riding the float are doing those things in the wrong order.  They spend, wait for money to come in, then budget to cover the spending.

Let’s walk through it. Follow me through time. It’s January. You charge everything on your credit card.  Bills, groceries, gas, everything.  You’re not worried because you’re going to pay the whole thing off next month.

Then you get paid in February and the bill comes.  Sweet!  You can pay it! Here’s the catch. Right when you pay off that credit card (with all of last month’s spending on it), it’s now time to buy more stuff!

People who pay the credit card balance in full often can’t cover the current month’s spending.  So what do they do?  They charge all the spending on the card and pay it next month. Do you see the cycle? It perpetuates itself.  You’re trapped a month behind.

Still not sure if this applies to you? Here’s the test to determine if you are trapped in the float: If you can’t pay the credit card in full right now AND meet your current obligations, you’ve got debt.  You’ve probably been riding the float.

If you’ve been riding the float and then decide to try YNAB, you get a huge wake up call. YNAB is like that really honest best friend.  You know what I mean–the one who tells you the truth even when you don’t want to hear it.

YNAB wants you to create a budget with money you have.  So YNAB sees this credit card debt and puts it in your face, saying, “Hold on there, Cowboy!  You only have enough money to pay off the credit card OR budget for this month’s expenses.  You can’t do both!”

If you pay off the spending from last month on the credit card, you’ll have nothing to budget with this month. If you use the money to budget this month, you can’t pay off the whole balance on the card.

You may be thinking, “How did this happen?!?  It’s not fair! I was being so responsible! I paid it off every month.” It happened because every time you charged on that card, you promised away future income.

So what to do?

1:  Acknowledge that this is debt.
2:  Make a decision.  Do you want to break the cycle quickly or slowly?

If you want to break it quickly, stop paying the card in full.  It’s painful, I know.  But it will allow you to budget for your current obligations.  You’ll gain powerful awareness when you start connecting the money you have to a concrete plan.  You can still budget to pay off that balance a little bit each month.

If you want to break it slowly and continue paying it in full, cut back on all unnecessary spending. Slash wherever you can for a while.   Stop using the card unless you absolutely have to. You’re going to see a lot of overspending in YNAB,  so budget to cover it as soon as you get money.

Remember, you don’t own the money that you borrow despite the fact that it is in your possession.  It’s a loan. Work as quickly as you can to pay it back and get to a point of true ownership.  At that point, you’ll have moved from living on next month’s income to living on last month’s income.

I want to be clear–I’m not against taking advantage of the grace period on a credit card.  I just don’t want you in a vulnerable position where paying that debt depends on future income.  Always remember: the future income is not here yet and is not guaranteed, but the debt is here right now–that’s a sure thing!

Once you’re living on last month’s income, you can use that credit card to your heart’s content because you’ll be budgeting with money that you already own, and you’ll know you can pay that bill anytime you want.  That’s freedom.  That’s peace of mind.

That’s where YNAB wants to take you.


33 Responses to “Are you riding the credit card float?”

  1. Stanley

    Can you give a bit more clarity in our situation?

    We have an offset checking account so it’s better for us to leave cash in our checking account for as long as possible to reduce the balance on our mortgage, therefore reducing interest payable on the mortgage. We pay everything on the credit card and pay it off in full every month. We budget at the start of each month by pre-entering the income in for that month. We aren’t living on last month’s income but it’s certainly a goal for us.

    Are we going about the method wrong?

    • erin

      Hi Stanley,

      When you enter those checks, have they arrived? If not, you are falsely creating money that does not yet exist in your life.

      We recommend only budgeting what you have. It can be a bit of a wake up call, but by focusing on what you have right now you can focus on what’s important right now.

      • Stanley

        Hi Erin

        I get paid on the 15th of each money so if we don’t pre-enter it at the beginning of the month for budgeting purposes, we have to split the pay in half, ie half for this month and half for next month. It’s messy trying to budget half amounts for the full month then budget again halfway through the month.

        I’d rather sit down at the start of the month and plan for the month.

    • Randy Merrill (@Zoramite)

      Hi Stanley,

      From what I have understood from the YNAB philosophy you aren’t doing it wrong, you just haven’t finished the last “nirvana” step. You are using this month’s income to pay for this month’s expenses, just through the credit card. (Worst case scenario you may be paying a bit in interest unless you are paying it off twice a month).

      The YNAB “nirvana” way is to work on getting to the point where at the start of each month your entire last month’s paycheck is in your account already to be used for this month’s budget. You can still use the credit cards and pay them off (preferably twice a month to avoid any interest), but the difference is that the money to pay off the credit cards came from last month’s income, not income from the current month which you may not have yet.

      So the next step would be to work on building up to the point that you start the month out with the previous month’s income in your checking account, untouched.

      With your offset checking that would probably be an added benefit since you would have potentially even more cash in your checking account at a time.

      So keep it up, you are heading in the right direction :)

    • wisekris

      We do the same but have the one month advance built in as well. So actually we have two months worth of cash on hand and then use the CC to get points and allow interest in savings to build up faster. I get what he’s saying though. Just be smart. Get your self in the BEST possible position financially and then see what you can handle from there. We went 12 months straight with 1 month ahead before we decided to grab a points CC.

  2. Al M.

    We’re very happy YNABers, but we are also big time credit card users . . . about 40 transactions a month. Because of our choice of credit cards (Costco AMEX), we’ll make about $500 in “rewards” (Costco Cash) each year.

    But we never, ever, ever carry a balance on the card. In 32+ years, we have never paid a dime of interest on any credit card.

    Also, the day we pay for something with a credit card, we take it out of our YNAB budget. When our monthly statement comes, we reconcile it to YNAB to make sure we didn’t miss anything.

    Thanks for a great program; we love the control we now have and it’s how we’ve been able to save money.

    • Arsenio Martins

      I was waiting to read a comment specifying exactly this. I use my AMEX blue cash card ALL the time. I buy all of my gas cards at the supermarket, if we are going out to eat I’ll try to remember to get those too. Why? Because I get 6% cash back from my AMEX card at supermarkets. I’ve made about $400 in cash back from doing just this.

      Also, AMEX runs a lot of deals like buy a $40 Simon Mall card (Visa card) and get $10 added on. I just made 20% interest in one transaction on a card I can use anywhere. They ran a promotion a while back where they were promoting small businesses (restaurants). the first $5 was given back. I bought $10 worth of food and only paid $5.

      Point is I think it’s ok to do as long as it’s recorded promptly and taken into account in your budget. Just let the money sit in the bank and FINALLY use the banks money to pay you!

      • Jake

        Don’t fool yourself that you are pulling a fast one on the credit card companies. They are very crafty bankers and have precise formulas for milking you. For example, credit card users are more likely to make impulse purchases and buy things you normally wouldn’t buy if you were using cash. Credit card users also spend more 2.5 times more per transaction than cash users.

        For example, AMEX gave you a $40 Simon Mall card. Would you have shopped there if they didn’t give you a card? How much extra did you spend over the $40? The bankers bank on you feeling like you aren’t spending real money so that you will spend more and spend frivolously. They want to lure you into “playing the game” because in the long run, they win and you lose.

        Sure there are some people who make a lot of discretionary income and have a buffer to play the credit card game but the overwhelming majority get screwed. Even if you are adept at playing the game, what does this teach your kids about finances? Your kids may not be as adept as you and may get themselves into deep financial trouble playing this dangerous game.

        All it takes is one month that you fail to pay off your credit card balance and the bankers make back all their promotional “money” they gave you in interest charges and late fees. And chances are you won’t just miss one month; you’ll very likely miss the next month too. Is it really worth the risk to play a game where they make up the rules and change change them any time?

  3. Steve

    This really is one of the most genius parts of YNAB, in my opinion. We have plenty in savings so we weren’t completely living off the float (we could’ve paid the bill from our savings account) pre-YNAB, but we were still somewhat caught in this trap. Money in our checking wasn’t sufficient to pay ever credit card bill and our monthly expenses deducted directly from the bank account. Now we’re truly living on last month’s income!

  4. Karl H

    “If you’ve been riding the float and then decide to try YNAB, you get a huge wake up call. YNAB is like that really honest best friend. You know what I mean–the one who tells you the truth even when you don’t want to hear it.”

    We’ve been using credit cards for years and, like others here, never paid a dime of interest (but saved bundles on hotel rooms with our “points”). However, I’ve never felt that YNAB gave us any sort of wake-up call. Money comes in during December. That money is budgeted to be spent in January. When we make a transaction, it is allocated against the budget, so it’s not available to spend anywhere else. When the bill comes due in February, we take the money budgeted in December and pay it off. Is that why we don’t feel betrayed by YNAB for “telling the truth” – because our plan still allows us to live on last month’s income? We handle credit card payments as a transfer – not as a budgeted item – that money in our minds doesn’t exist because we’ve already spent it (according to our budget)!

    • erin

      It sounds like you have the money in the bank and assigned in the budget and then you’re just using the card for the transaction. If that’s the case, you sound like you’re doing fine. :)

      And you are right, when you spent you remove it from the budget so it’s gone according to the plan – even though it sits in the bank until you pay the bill.

      • jcw

        Exactly. That’s what we do. If so, are we ‘using’ the float? I don’t think so.

    • wisekris

      Same here credit card payments are marked as “transfers” everything that gets spent is put on our log and is effectively “spent” till we transfer the money over and the account “balances” out.

    • Khana

      Sounds like you’re doing it the way he suggests, not living on the float like me.

      My wakeup call was today, actually. I realized that I don’t have enough money to make it till next paycheck. But most of my charges are on the cards, so I’d have never realized that detail. I had to make a “credit card debt” category, with a negative budget, to account for the problem.

      And that’s when I realized we’re living in the hole. His statement rang 100% true for me.

      Not for you, cause you’re doing it right. Soon, hopefully!

  5. Jay

    It was great to read this post because it validated that I am doing the right thing: I am paying off a chunk on my credit card balance while only continuing to use it for the basics I absolutely have to charge, but I am budgeting repayments BEFORE the charge happens. So I THINK I’m in a good place… I’m paying off the existing, pre-YNAB debt without actually incurring any new debt because I am already budgeting money for new spending before it actually happens… I think that’s the way this post is recommending it happens, right?

    • Erin

      You got it! Budget for any repayments toward the old debt, and budget for all new spending with money that you own, and you’ll be golden. :)

  6. ernests

    Thank you.

    My wife downloaded this in May of last year. We’ve been using it every day since then.

    It’s made a difference in a way that is easy to explain, but hard to imagine this time last year.

    Since that purchase last year, we’ve managed to get completely free of credit card debt.

    This month, we are buying a house.

    I am sure that her decision to get your program is the reason.

    • Jay

      Congratulations ernests on getting rid of your credit card debt and on buying a house this month – that is so exciting!

  7. pcasaretto

    Hey Erin, about “If you want to break it quickly, stop paying the card in full”.
    Is that a good advice? I mean, at least in Brazil where the interest rates on credit cards are insanely high (453% /year) that doesn’t sound like a good option.

    • johto

      i think it means stop using the card on any new stuff, not paying stuff from the card no more. You WANT to pay the credit off as fast as you can!

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  9. J

    “If you want to break it slowly and continue paying it in full, cut back on all unnecessary spending. Slash wherever you can for a while. Stop using the card unless you absolutely have to. You’re going to see a lot of overspending in YNAB, so budget to cover it as soon as you get money.”

    Can you go into a little more detail about this? Or point me to a tutorial? I need to make this change slowly, but I am not sure how to handle overspending in the transition.

    • Khana

      I disagree with a lot of their advice, actually, including this point.

      For my household, spending money on credit cards is mandatory for maintaining our budget. It’s how we operate – leaving a digital paper trail for every single purchase.

      Try thinking of credit cards like debit cards – ever thinking, “I can’t really afford it now, but I’ll get it anyway, and pay it off later…” that’s bad for the budget. Obviously, emergencies happen, and that’s why credit cards are awesome, but it’s important to remember that such a statement should *only* be acceptable in a legitimate emergency.

      How I handle the revolving debt is I make an actual credit card debt line in my budget. I withdraw (by putting a negative amount in the budget field) however much I need to make my budget balance. I may wiggle the numbers over the course of the month, to make sure I’ve got the right figure in there.

      Once I do, then I treat it like any other debt category.

      If you have the money in your bank account to pay for the credit card purchase, and you pay it off every 2 weeks (there’s a 21 day grace period – NOT 31 day – to avoid interest. If you don’t want interest charges, you need to pay it off in full every 21 days. I do it every 2 weeks, for simplicity’s sake), then there’s really no difference between that and a debit card.

      If you *don’t* have enough in your bank account for the purchases PLUS the other purchases you need to make (IE rent, etc), then it is debt.

      Nice thing about YNAB is, it’ll handle the overspending issue for you, as you go along. Make sure you budget the month such that the new debt category drops by at least X amount per month, and you should be good :D

  10. Lisa

    Thanks, Erin. I suspected I was about to make an unwise decision, so I typed the word “float” in the YNAB Blog search field, and here I am: two days before payday, rationalizing a grocery purchase (on the rewards CC) that would exceed the balance of my grocery budget. It can wait.

  11. Lea

    This is wonderful and very helpful. My follow up question — how are you supposed to build credit if you’re avoiding using credit cards? You just wait until you have the money for the purchase in your sinking (or whatever) account, make the purchase, and pay it off right away? How long does the transaction have to sit to earn credit?

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