What is the quickest way to get off of the credit card float

Hi! I started to use YNAB in November. At that point I knew I was on the credit card float but didn't know how to get off. I have since then stopped paying the card in full every month and only paid off what I had in the credit card payment category each month when my payment has come due. My plan is then to continue this system plus put extra towards my credit card debt until I pay it all down. My question is, Is it smarter to pay this off as quick as possible, even if it means not putting as much towards true expenses say my car registration that is not due until next November or Christmas because once it's paid off I free up that money to then save for the other things or should I put money aside for those true expenses simultaneously and then just put whatever is left over towards my debt. I have about $5000 left to pay off on my credit card. I'm having trouble figuring out the best way to go about it. 

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  • Since you've stopped paying the card in full, you're not riding the float. You're simply paying down debt.

    Although the math is clear all things being equal, this is going to be a gray area / personal call. Consider two cases: 1) you budget toward true expenses and therefore budget less in discretionary categories. 2) you budget toward the CC debt (instead of TEs) and therefore budget less in discretionary categories. The issue is you may easily not budget the same toward CC debt as you would the TEs. This typically leads to spending more in discretionary categories, slowing down progress out of debt. Yes, interest is less, but that's a relatively minor difference.

    There's also the emotional aspect. Some people feel like failures for having to resort to using the CC. Others look at it as they have saved interest, so it's a win. It's a glass half empty vs. half full argument. Only you know your mentality.

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  • Violet Wildebeest  Do you have a comfortable amount of savings where you could take out $5,000 and pay off the credit card in full? When I started YNAB, I took out money from savings in order to get off of the credit card float immediately. It was worth it for me, but I realize not everyone has savings to be able to do that.

    Another option is to look into credit cards with balance transfer offers of 0%. Note that these offers are usually only for a short period of time like 12-18 months, and that if you don't pay off the original balance by then, some credit card companies will charge you fees. But if you think you can pay off the original debt in that time, a 0% balance transfer will at least prevent that high credit card interest from accumulating on what you already owe. This will ensure that all of your money paid goes toward the principal of what you owe, which should speed up the process.

    But that still leaves the hard work of paying off that principal. As dakinemaui  suggests, whether to prioritize paying down interest versus building up your true expense categories will be a personal call. I would say that it should depend on the type of true expense. For example, insurance is a necessity and shouldn't be skipped. However, perhaps for truly discretionary categories such as Christmas gifts and vacations, you can think about the true expense and find a way to reduce it until the credit card debt is paid off.

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  • Personally, I would intentionally ride the CC float on a different card, which is effectively a 0% loan for as much as you can consistently charge each month. If you normally have $3000 in monthly expenses that you can charge, this allows you to throw $3000 at the debt. Now you're only paying interest on the remaining $2000. You also budget toward reducing this debt as a normal priority among all other demands -- including True Expenses.

    I would also snowball the True Expense differences toward debt. What is that? Typically you're playing catch-up with true expenses. An annual TE, for instance, usually requires more than 1/12 of the outflow amount because you start with fewer than 12 months to go. However, after you've paid the bill, you split the amount over 12 months, requiring a lower monthly contribution. The difference can now be put toward debt. For example, a $1200 annual expense due 3 months after starting to save requires $400/month. After you've paid it, it only requires $100/month, allowing you to throw an additional $300/month toward debt.

    ETA: One advantage of this approach is that you develop good habits. You will plan your spending. You will reallocate to cover ALL overspending. You stop the "kick the can down the road" mentality.

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      • dakinemaui
      • dakinemaui
      • 7 mths ago
      • Reported - view

      How do you start riding the CC float? First of all, it's critical all purchases are budgeted. No yellow overspending can be allowed to remain. In fact, check category balances ahead of time so you don't even have overspending. Then:

      1. Start putting everything on the empty card, raising the debt AND CC Payment by $X (your normal expenditures).

      2. After a month, you get the bill for $X due a month from now. Schedule this in YNAB and the real world (if necessary) to be paid on or slightly before the due date.

      3. After another month (now just prior to the due date), you've put another another month's worth of spending, raising the debt and payment by $X, resulting in $2*X in each.

      4. The crucial part -- the CC has only asked for $X and you have $2*X in the category. So move $X from this CC Payment category into the interest-bearing card's payment category. The payment toward the "float" card takes the category to $0.

      5. Hopefully the rest is clear. A few days later you get a bill for $X (having applied your payment). Your category is empty. You now have about 4 weeks of normal budgeted purchases to increase the payment category by $X.

      Obviously you're spending won't be exactly $X every month. If you don't get the float Payment category up enough, you'll have to budget the difference (and budget less elsewhere, perhaps toward the debt card, perhaps something discretionary, whatever your priorities).

      After the interest-bearing card is paid off ($0 balance), switch to throwing debt at the float card. Or, if the rewards are better on the interest bearing card, flip the roles when the balance is $X instead of paying it down to $0.

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  • Slate Blue Pilot said:
    Another option is to look into credit cards with balance transfer offers of 0%

    Be aware these typically charge 3-5% up front. Use 5% as an example as well as 18% for the interest-bearing card's APR. That 18% is equivalent to roughly APR/12 = 1.5% per month. (The real number is actually 1.39%, but the math is harder.) If if you can make $5k in normal budgeted purchases quicker than about 3 months, you'd pay less out of pocket with a 0% purchase promotion rather than a 0% balance transfer promotion. That said, the balance transfer promotion is quick, simple, and usually available.

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  • I would continue to pay the statement balance every month, continue to usethe card normally and just budget some additional money to the payment category every month until the available balance is enough to cover the entire CC balance. This avoids paying interest entirely and you are no worse off than before you realized you were on the float.

    Not incurring interest will be the quickest way off the float, because incurring interest is an additional expense that slows down the ability to get off the float.

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      • dakinemaui
      • dakinemaui
      • 7 mths ago
      • Reported - view

      nolesrule Can you elaborate with regard to budgeting to the true expenses and what OP should do in the event the CC Payment category goes overspent?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 7 mths ago
      • Reported - view

      dakinemaui you let the CC payment go overspent. After all, that's what it was doing before... there was just no YNAB to tell you that. But budgeting some money to the CC payment category, each month will be less and less overspent.

      As long as you are using the credit card enough by continuing to make regular purchases so that it gets green at some point, then there really aren't any other issues to be concerned about.

       

      Sure, you can rip the band-aid off, and just budget off the float, but I would only recommend that if your emergency fund can handle it. I wouldn't raid True Expenses to do it.

      The last thing I would do though is incur interest, especially at credit card rates. I started YNAB with a $5800 float. That would have been nearly $100 in interest that first month... and that will slow down the rate of getting off the float, especially if you don't have an extra $100 leeway in your monthly budget to get off the float.

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  • nolesrule said:
    As long as you are using the credit card enough by continuing to make regular purchases so that it gets green at some point, then there really aren't any other issues to be concerned about.

    The critical thing is the CC Payment gets green before the end of the month, otherwise OP will have to restore the negative balance each month.

    OP, nolesrule and I obviously differ on this topic with regard to suitability for the masses. I don't mind suggesting that new users ride the float within the confines of what they can spend in budgeted purchases each month, and YNAB will not fight you on this. Categories stay positive and all balances are backed by cash in the bank. The official support channels will be more relevant since you're following the methodology (specifically Rule 3).

    If the CC Payment is red, that is an indication you are trying to float more than your spending habits can support. This implicitly steals money from other categories, which are then misleading. (They don't have the money they say they do.) YNAB will not let this linger, so you will have to "undo" any correction it makes each month.

    Put it this way: if the deficit in the CC Payment category is an appreciable portion of on-budget funds, you risk not having the cash required to pay the things you cannot put on the CC. If you don't feel that is a risk -- i.e., your CC payments haven't been growing and you haven't been short on cash -- then by all means save the interest. To summarize the negative-category approach:

    1. Pay the statement balance on or slightly before the due date

    2. If you end the month with the CC Payment in the red, budget a negative value in the new month to restore the negative balance. (This could increase TBB in the old month, which must be left alone. Another reason I dislike this approach.) When you budget for actual debt reduction (see #3), you will need to add this to the existing budget entry (becoming less negative).

    3. Whether to budget for True Expenses is still an open question. I'd suggest that you do budget for them with the remainder going toward debt (in the CC Payment category). After all, you're not paying interest, and presumably those TEs can be put on the CC.

    In contrast, I'd recommend riding the float within your spending constraints and treating the remainder as interest bearing debt. The interest incurred is the price you pay to be able to rely on cash being available where your budget says it is. You're the only one who can decide if that's important to you.

    FWIW, the negative-category approach will eventually converge to the positive-category approach I described once the amount you're floating is supported by your spending patterns. YNAB will stop fighting you at that point (see step 2 above). Keep budgeting toward debt, though, as paid-in-full status has the category cover the entire account balance.

    Regardless of which road you go down, do not tolerate overspending elsewhere. That is a sign your float is increasing.

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  • nolesrule said:
    just budget off the float, but I would only recommend that if your emergency fund can handle it.

    I'd absolutely use emergency funds to reduce the float regardless of how you choose to track that float. There are not many emergencies you cannot put on a CC, either directly or indirectly. With any luck, it will decrease the float to within that supported by your spending patterns. After reaching PIF status, build the EF back up.

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  • You can also start today, that all new spending has to be accounted for in your budget, and your card is debt that needs to be attacked. Pay your card off every few days with the new spending so you are not adding to your debt.

    You need to really chop your daily expenses. I have a category for them with a limit in the title. Some items in that category that I am really chopping have spending limits in their titles. But regardless of how I spend my category, they are all under the umbrella target lower budget amount. :)

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