Living on Time with Your Credit Cards
We all know that the proper use of a credit card is to pay it in full every month to avoid paying interest, but even people who have that habit may be abusing their access to credit by slipping into a ‘buy now, pay later’ attitude. Even if you pay your credit cards off in full each pay period, if you are making purchases with money you expect to come in but haven’t received yet, you are behind.
What would happen if your pay didn’t materialize for some reason, or if another emergency came up? You would be making a bad situation even worse by having those previous obligations. Even though you may not exceed one or two months’ typical spending on your credit card balance, you are still borrowing against your future to pay for your present.
The ideal way to use a credit card is to treat it like a debit card. Never make a purchase on a credit card that you couldn’t pay for that very day from your checking or savings. In this way, you are living on time as opposed to one to two months behind. When I first became financially independent from my parents, I used debit exclusively. If you have any questions about your willpower to live within your means, I highly recommend this approach until you have confidence in your own self-control. After some time, I switched to using credit cards for all possible purchases, yet I know that I always treat them like debit cards and pay them off 2-3 times per month.
But what can you do if you are living a month behind and want to get on time? There are two basic approaches, and which one you take will depend on how behind you are and what other money you have available.
1) Go Cold Turkey
This is the simplest way to start living on time – just stop making purchases before you have the money to pay for them. The cleanest way to do it is to immediately switch to using a debit card until you have your credit card balances cleared up. If you want to continue using your credit cards, you’ll have to clearly calculate what is the balance you have to get rid of and what are currently allowed purchases.
You will have some kind of balance on your credit cards that you’ll need to deal with during that first billing period. Pay it off using:
- cash flow, if the balance is low and you can force yourself to have a lean enough month or two
- short-term savings (not your emergency fund)
However, if you have really been abusing your credit cards, you likely won’t be able to both pay for your current month’s expenses and your previous month’s expenses simultaneously, which means you will have to use the second approach.
2) Wean Yourself Off
If you can’t go cold turkey with your credit cards, at least draw a line in the sand and set a goal to be living on time within a defined period of time. By carrying the balance forward (as you have been), you can draw out the period you have available to pay for your previous balance while still avoiding paying interest. Whenever you create your goal, calculate the balance you need to catch up on and then set a period of time over which you will pay it down in steady increments. For example, you could pay off 33% of the balance each month for 3 months or 8.33% of the balance each month over a year. With this approach, you must be firm with yourself and keep good records to avoid slipping backward into living one to two months behind.
Whether you will live on time with your credit cards and the approach that you choose will depend on your other current financial goals. Yes, getting to on time with your credit cards would mean slowing down debt repayment, if you are working on that already. Only you can decide which is a higher priority for you, as both expose you to some risk. I think I would rather be on time with my credit cards than have an aggressive savings goal, though.
Living on time is an exercise in delayed gratification. You may have even already earned some money in a given pay period, but if you haven’t been paid it yet you don’t know for certain that it will come in on time. It takes discipline to live this way, but the benefit is the certainty that you have the ability to pay off your credit cards anytime you like. Credit card debt is scary and not something I want to even flirt with!
P.S. What I term ‘living on time’ other people call ‘getting a month ahead.’ I prefer my terminology because the default operating status should be to make purchases with money you have already been paid rather than what you expect to be paid. It’s all about where you draw your baseline, and I think language matters in reflecting standards.
Are you living on time or one or more months behind with your credit cards? Have you ever had to catch up with your credit cards and if so how did you do it?
photo modified from Kaiyan
Filed under: credit cards · Tags: credit, debit, living on time
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I dunno. We live a month ahead when we aren’t saving for something big but have an emergency fund that would cover a paycheck snafu.
Nicoleandmaggie recently posted..Do you feel any pressure to be a “super mom”?
I agree that having an EF diminishes the need to be vigilant about spending only what you have available, though I still think it’s useful. Why would your policy toward living on time change when you are saving for something big?
We have 68k in savings right now because we are saving for a year off. That is well over a month’s spending. But it also isn’t a dedicated emergency fund.
Nicoleandmaggie recently posted..What did we get people this year?
Well, this is timely: I just yesterday paid off my credit card and became totally debt-free 🙂 (Also, got a new URL; thesingledollar.com. It was a big day.)
I’ve paid down big credit card balances before, but never while I was simultaneously saving and budgeting — I always just did it by throwing whatever “extra” money (after bills) I had at the card each month until the balance was gone. This time, I had a 0% interest rate and I decided to stretch out the repayment so I could save as well. Plus, I was still using the card, because I wanted the cash-back points (I used them to help pay down the balance: win-win). So doing that — keeping track of what I was paying for out of my monthly budget, plus what I was scheduled to pay on the balance — would have been complicated, but I started using YNAB early in the summer and that’s made it pretty easy to keep track of everything.
C@thesingledollar recently posted..100% Completely Absolutely Positively No Doubt About It Debt-Free
Congratulations! Good work!
nicoleandmaggie recently posted..Things to be paranoid about part 2
Congratulations on both accounts! What an accomplishment! It sounds like you had a good, clear system in place to differentiate between your outstanding debt and ongoing purchases. I’m glad YNAB is working for you.
My parents would always figure out when to pay for items based on credit card due dates and that’s what they taught me, in addition to always paying it off by the due date.
I don’t like their way though and I treat the money as spent the day I spend it, regardless of where it’s spent. I don’t pay off the credit card until the due date, but I count my expected checking account balance as the remainder of all my budget categories plus my credit card balances, so I always have enough money to pay off the bill in full.
We do the same thing with our balance sheet each month, although we pay the cards at the beginning of each new month (after a cash infusion from savings, in the case of this fall) instead of when they are due. Any chance of teaching your parents your method? 🙂
There’s two ways of looking at this though – you are using the credit facility to your advantage when you ‘use’ it, and delay payment without incurring the interest charges, whilst at the same time your ‘savings’ are earning interest.
If I don’t get paid, then the savings come out, and go on the credit card. How often does my weekly pay not come through? One in a blue moon. The point is, my credit spending, and limit, are in the order of 10 times LESS than my savings. I have no problem using the credit facility to extend the time my savings are earning me money. (Most of my savings actually sit in an offset acocunt to my mortgage, so aren’t actually ‘earning’ interest, but lessening the mortgage’s interest).
I don’t discount your advice at all, but it’s not applicable in my situation, that’s all.
SarahN recently posted..Why so quiet?
It’s not just about a paycheck not coming through, though, but a potential emergency happening after you’ve already committed your funds.
My attitude toward credit cards is that they are designed to be dangerous to me. I’ll play in the shallow end of using them like debit, but I don’t want to venture into the deep end of playing games with interest rates and dates. In that way I am a KISS person.
I certainly don’t play with dates, and that game, a little too risky for me. But I will use credit cards to ‘tide me over’ with such a healthy cushion of liquid cash.
SarahN recently posted..Why so quiet?
I’ve never used a credit card without knowing I have money in the bank to pay it off at that moment. The only reason I use it in the first place is to get rewards.
Stefanie @ The Broke and Beautiful Life recently posted..A Black Friday Lesson For the New Year
Same same for us! (Well, I think six years ago I bought a flight that I knew I would be able to pay before the due date the following month, but the ooky feeling it gave me is what prompted me to always have the money available at the moment.) If there were no rewards involved and no extra fraud protection, I don’t think we would be using credit cards.
Credit cards can be a blessing or a curse. I have three cards that I use. Most of my expenses I get 5% back.
You really need to stay out of 18%+ credit card debt. Even a $400 balance is a huge amount of interest.
No Nonsense Landlord recently posted..November – December 2014 Rental Cash Flow
That’s a great rewards rate! We are mostly at 1%. :/ Exactly as you said – I want to stay far far away from the possibility of not being able to pay off my cards!
You know what I panicked because of my credit card bill. It was due on January 3 and I couldn’t pay because I was on vacation and the holidays. I hate that feeling having no choice. I was lucky that I called the customer service who said that it had been moved to January 9. I hate paying late, you know the ‘interest”.
Jayson @ Monster Piggy Bank recently posted..Farewell 2014 & Welcome 2015
That is really nice they were able to move the deadline for you – I didn’t know that was an option!
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