Understanding the Credit Card Float
What is the credit card float?
When you charge on a credit card, you're given a grace period to pay things off. So 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.
Because you pay it off every month, you feel like you’re doing fine. But in reality, you’re a month behind. It’s often difficult to realize this because it's hard to visualize.
We want people to budget money after they receive it and then spend according to that plan. Then, repeat those steps each time they receive money.
When you start YNAB, even if you pay your card in full each month, you probably have a balance on it. YNAB considers that money debt for two reasons:
1. You owe it.
2. You never budgeted for that prior spending.
You charge a bunch of spending on the credit card. You pay bills with this card, buy groceries, etc. Everything goes on the card. The total is $3,700.
You find YNAB. You enter the starting balance on the credit card which you have not paid yet. YNAB creates a Pre-YNAB debt category and assigns the balance there. This is where you will budget to pay back this debt.
You get paid $4,000. You want to pay this in full, so you budget $3,700 to this category. Great, now you can pay the bill.
Here’s the problem: There’s only $300 left available to budget. You can’t budget for the entire month now because the vast majority of your money went to the credit card.
Here it is in a nutshell: You are using this month’s money to cover last month’s spending. Since that money is gone, you can’t budget for this month’s spending.
Enter Income > Budget Income > Spend according to that plan.
Your steps are:
Spend > Enter Income > Budget to cover past spending.
How do I break the cycle of the credit card float?
There are two options:
1. Treat the balance as debt and pay it off slowly.
- Pros: You’ll be able to budget proactively for future spending. You’ll be able to see this debt in one place.
- Cons: Since you won’t be paying the card in full, you’ll be paying some interest on this debt.
In this case budget the $4,000 where you need it first. Whatever is left is budgeted toward the credit card category and that’s what you send toward the old balance - the Pre-Ynab debt.
In July, you were able to budget $900 toward the debt after taking care of other areas:
In August, you cut back in some areas and manage to send more to the Pre-YNAB debt balance:
In September, you can see the end in sight, so you really buckle down and cut back. You decide to skip budgeting for rainy day funds for one month and manage to pay back the entire debt balance:
At this point, you no longer need the Pre-YNAB Debt category, so you can hide it.
This approach allows you to use YNAB as it was designed right from the start. You’ll start to think proactively about what you want your money to do and gain powerful awareness as a result.
2. Continue to pay it in full and cover overspending as soon as you can.
- Pros: You’ll continue to pay the card in full.
- Cons: You won’t have much money to budget with since it will have been sent to the credit card company to cover last month’s spending.
Since you only have $300 left after budgeting for the credit card, there will be a tremendous amount of overspending in the budget. Let’s walk through it.
In July, you start YNAB and decide to budget $3,700 toward the old debt on the credit card.
This leaves you with $300 available to budget so you budget that toward rent.
The good news is since the pre-ynab debt is paid off, you don’t need that category anymore, so you hide it.
Now, the rent is actually $1200, so you’ll need to use your credit card to pay this. In fact, virtually all spending has to take place on the credit card since you sent most of what you had in checking to cover the prior spending on the card.
You track your spending for the month and since you have can’t budget for anything, in the end you are overspent by $2,220. ($1,500 in monthly bills plus $720 in everyday expenses)
YNAB subtracts this amount from August to force a correction leaving you $2,220 less to budget with for August.
Now you are paid $4000 in August. You go ahead and pay the credit card bill.
$1780 is left in your checking account and that’s what is available to budget. Remember - YNAB subtracted the overspending so that’s been accounted for.
You budget those dollars as far as they will go and track your spending in August. Now you can use your checking account since you have a little more cash on hand.
There’s still some overspending and that’s subtracted from the top of September to correct it, but it’s not as much as last month.
Now it’s September, and you’re paid again. Again, you pay the credit card bill in full.
After the correction, there’s $3330 available to budget. You decide to buckle down and just live on this money. You give every one of those dollars a job.
This month you still charge spending on the card, but there’s no overspending at all!
This means you’ve used your credit card wisely and can pay the bill at any time.
While both these walkthroughs were simplified, the concepts apply across the board. Either approach will get you there. Some people find it easier to just focus on the overspending in one place - the pre-ynab debt category. Whichever approach you use, your goal should be to eliminate more and more of the red each month until it’s gone.
To learn more about how credit cards work in YNAB, check out our other credit card articles and our video on Handling Credit Cards.