Are You Riding the Credit Card Float?

Every time I explain the credit card float to people, I feel like the bearer of bad news. There they are, happily paying their bills (for the time being) when I roll up and point out the flaw in their plan, like some self-appointed Safety Patrol of Personal Finance.

It’s not a fun role for me to play (okay, I don’t actually hate it), but it is an important concept to understand, so I’m going to take some time here to explain it.

(Don’t worry, I’m only writing warnings; there are no actual citations being issued. Yet.)

What is the Credit Card Float?

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 the balance in full within that time frame, you are not charged interest. Many people take advantage of this, and even feel good about doing so. They charge their expenses this month, then pay them off next month.

How Do I Know if I’m Riding the Credit Card Float?

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’re using the YNAB app, we’ve got your back. If the balance on your credit card account is ever higher than the amount you’ve set aside for your payment, the Credit Card Payment category will turn yellow, and you’ll see a friendly alert telling you how to fix it. Alternatively, if you have a Debt Payoff Target on your Credit Card Payment category, YNAB will remind you to assign money to meet your target.

The Credit Card Float Looks Like This:

1. Spend.
2. Wait to get paid.
3. Allocate cash to pay the credit card bill.

When you use a credit card, 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.

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

Our Recommendation for Healthy 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 financial nirvana. 

It works like this: Money comes in, then you distribute those dollars to your categories. Then you spend, letting YNAB guide your spending decisions.

What a Better Cash Flow Looks Like:

1. Get paid.
2. Give every dollar a job (including that credit card payment).
3. Spend.

People who are riding the credit card float are doing those things in the wrong order. They spend, wait for money to come in, then assign 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 before the due date.

Your paycheck hits your bank account in February and the credit card statement comes. Sweet! You can pay it! Here’s the catch: When you pay off that credit card (with all of last month’s spending on it), it’s now time to buy more stuff for this month.

Check out our comprehensive guide for more information about how to get out of debt.

The Problem With Riding the Credit Card Float

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 credit card account 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 that test again: Can you pay your credit card in full right now AND meet your current obligations with your cash on hand? If you can’t, you’re probably riding the credit card float.

If you’ve been riding the credit card 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. That’s a good friend. 

YNAB wants you to create a plan 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 fund 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 no cash on hand for your necessary expenses this month. If you use the money to fund this month’s expenses, 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?

How to Get Off the Credit Card Float

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 fund your current obligations. You’ll gain powerful awareness when you start connecting the money you have to a concrete plan. You can still make a plan to pay off that balance by throwing some money at it every month or by reallocating money from any categories where you have some wiggle room.

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 move money to cover it as soon as you get money.

Remember, just like with the library book, 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 make a plan 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.

Want to get off the float and start getting a month ahead on your money? Try YNAB free for 34 days, no credit card required!