Using Credit Cards
There are 3 scenarios when using credit cards:
- Decreasing amount owed on a CC (making a payment)
- Increasing amount owed on a CC (using a CC to cover expenses)
- Paying a CC in full every month (paying for BUDGETED monthly expenses using a CC, then paying off the full amount)
Making a Credit Card Payment
Here we are talking about making a payment on a Credit Card where we owe something. This can either be on an old card we are no longer actively charging on, or a card we are still needing to charge new expenses to. This example shows as though the card is not being used to cover new expenses and we are just paying down the debt.
Let's say our minimum payment is $50, but we decide we are going to pay $100 on the card. We need to account for that in our budget, so we put $100 into that category as you can see here.
In the above image you can now see the category balance for Credit Card 1 is showing -$900, but the Account Balance is showing -$1,000. This means that payment has now been processed yet. Now lets say today rolls around and the payment to the credit card from our checking account gets made. We enter that in you Checking account register as such.
As you can see the transfer from Checking 1 to Credit 1 does not have a category associated with it. This is because it is already in our budget. We are just moving the money around. Next if you look at the budget you will see the category balance for Credit Card 1 matches the Account Balance for Credit Card 1. This means the payment has gone through. Notice you DO NOT see any transaction in the outflows section of the budget for Credit Card 1. This is normal. You can tell the payment has gone through when the Category balance matches the Account balance.
This process would continue every month. Budget $100 to Credit Card 1, the Category balance will show $100 less than the Accoutn balance until the payment goes through. Once it does then the Category and Account Balances will match.
This is all there is to paying down Credit Card Debt! But wait you say...what about interest? When your statement comes out you will go and see how much interest you were charged for that month. This gets added as an outflow transaction to teh Credit Card Account using the Credit Card category as you can see below.
And now when we look back at the budget we can see the outflow in the Credit Card category, and the Category Balance still matches the Account Balance because the payment we budgeted for HAS been made for this month.
Charging to a Credit Card
So let's say you just started using Financier and you are still working towards fulling funding your emergency funds when suddenly you are hit with a bill that your budget (and bank account balance!) just can't handle. As much as we all hate it, soemtimes we HAVE to charge things to a credit card knowing we will not be able to pay it off in full.
In this example we will say that we just got hit with a $2,500 car repair bill. We had $500 in our car repair budget, but we need to charge that last $2,000 onto our credit card.
First let's take a look at our budget and Account balances so we know where we are starting from.
When we paid at the car place we knew we only had $500 in our account, so we paid for part of it using Checking, and the remaining we paid for using the Credit Card.
You can see in both of these examples we used the category of Car Maintenance. However, what does our budget look like now?
You can see, that the Car Maintenance category is showing 2,000 in the red, and that the Credit Card category isn't showing anything. But we actually need that -2,000 to be represented in the Credit Card category! This is where the fun happens. We need another $2,000 to be able to budget to the Car Maintenance category. We haven't gotten any Income, so where will that money come from? From the Credit Card category! We enter a -$2,000 into the Credit Card category.
You can see we now have 2,000 available to budget at the top. Now we can apply that $2,000 to the Car Maintenance category.
As you can see our available to budget is back to $0, the Car Maintenance category is at a $0 balance, and the Credit Card balance is showing -$2,000.
We have created NEW debt by allowing that money to be allocated elsewhere in the budget!
But now, what do we do when it comes time to pay the Credit Card for this month? For this example we will say we recieved our paycheck of $500, and the minimum payment on the Credit Card is $100. We first enter our Income into the Checking Account.
In our budget you can see we now have another $500 available to budget.
We know we have to pay $100 on the Credit Card bill later this month. So we need to budget $100 towards that. We do that by adding $100 to the $-2,000 in the Credit Card budget column to make that amount -$1,900.
Now, similar to the previous example, the total negative credit card balance of -$2,000 does not match the Category balance for the Credit Card. This is because that payment has not been made yet! Let's say the 23rd hits and we pay $100 on the credit card from the checking account. This happens as a transfer from the checking to credit card WITHOUT a category. This is because the money we are transferring is not leaving the budget. It is just changing accounts. We already accounted for it when we allocated it to the credit card category.
Now when we look at the budget we notice that the Credit Card category balance matches the Credit Card account balance. This means the payment for the month has been made!
Now, assuming that we do not need to use the Credit Card anymore in the future for any additional expenses, we can start budgeting for the payments starting in March as outlined in the previous example!
Using a Credit Card and Paying in Full Monthly
Next up we tackle the actually easiest of the 3 scenarios, Using a Credit Card to pay for expenses throughout the month that are already budgeted for with available money.
People choose to do this for various reasons. Usually the biggest two reasons are to help build their credit, and to get the rewards that many cards offer for each dollar spent using the card. Usually you would only do this if you were already fully buffered, so that the income from this month was going to be allocated towards next month's expenses.
Let's assume that we had an income in January of $1,000 that on February 1st we allocated in our budget to a few different categories.
Then throughout the month we utilize the money in these various categories to pay for various things using the Credit Card.
Our Credit Card balance now shows we owe $51.84. But this is no big deal! We have our Credit Card set to Auto PIF (Pay In Full, sometimes called Pay the full Statement amount) and we are paying the total balance with money that we already have in our checking account and budgeted. Since we have been spending according to our category balances we KNOW that we have enough money to cover the entire payment. So what happens when that automatic transaction happens later in February?
You can see that we have transferred (made a payment) from our checking account to the credit card to cover the entire amount we owed. The account balances reflect this. But what do we have to do with our budget?
NOTHING!!! As you can see, because are not actually adding or subtracting any actual debt, the Credit Card category stays nice and clean. Remember, this category only gets used when we are adding or subtracting debt that we do not intend to pay off.
Reconciling can APPEAR to be a bit more complicated, but this is only because if you continue to do this every month the credit card balance never hits $0. But since we are paying off the entire Statement amount every month we never get hit with any interest charges.
Dealing with Credit Card Interest and Fees
Interest and Fees can appear to complicate things when using Credit Cards, but it is actually very simple.
1) If you are paying the entire statement amount on a card every month that has a fee, be sure to budget the fee amount towards the credit card category every month.
Since you already budgeted money towards the fee, it is the exact same as all of the other categories you have funded and paid with the credit card. Once the fee has been applied and the transfer made the category balance will once again match the account balance.
2) If you are not paying the statement amount and are adding interest, when the interest hits the statement add the amount of the Interest with the Card name as the payee and the category the same as you would do above with the fee. This adds the interest to the amount that you owe on the card in your budget.