Completely confused on handling credit cards and interest

I'm trying to get my mind wrapped around the issue of credit card payments and interest when you carry debt. I'm new to YNAB and this just is NOT clicking for me.

Say I have credit card A with a $1000 debt.  I want to make a payment of $50, so I budget that amount.  The payment is made and it shows my debt as being reduced by $50.  The next day, I get interest added to my account of $10.00.  YNAB wants me to anticipate that I'm getting this interest charge this month, after my payment has been made, and to budget for it with dollars I don't yet have. 

What am I missing?

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  • If you can't budget for it, then it will increase your credit card debt.

    later you can budget money to the payment category and make the payment in the available amount per the payment category.

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  • But when I download the transaction that shows my interest, it needs to be assigned to the Interest and Fees category, right.  That category now shows up as yellow even though it won't be paid until the bill comes in next month.  What happens when the month rolls over?  

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
      • Reported - view

      Coral Chef Yellow is overspending on a credit card. That means the activity does not increase your payment amount on the card, i.e. it becomes carried debt. Carried debt can be paid down by budgeting for the payment in the payment category.

      If you end up budgeting for it in the interest category and before you make a payment, then the activity will become budgeted spending and your payment category will increase by the amount you budgeted.

       

      The payment category represents the amount you can pay toward your credit card from charges that have been budgeted for and/or from money budgeted to the payment category. When you make the payment, the category then decreases by the amount of the payment. Rinse, repeat.

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    • nolesrule  So what happens at the end of the month if I don’t allocate funds to cover the yellow? Does it stay yellow when the month roles over?

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    • And what about the payment I make NEXT month. That would include the interest that comes between my Jan payments and Feb.  So if I allocate $50 next month, how do I show it in YNAB?  

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
      • 1
      • Reported - view

      Coral Chef No, categories do not stay negative when you go to the next month. Red categories remove it from To Be Budgeted in the next month and Yellow categories go to zero (it's converted to carried debt because credit card overspending won't change your credit card payment amount).

      The $50 credit card payment is fungible once the money is on the card the credit card doesn't care if the spending was budgeted for or not. That only matters to you. If you aren't going to budget for the interest because you currently do not have the money, as I said your carried debt will increase by the amount of the interest. When you budget $50 to the CC category and then pay it, you'll then reduce the carried debt by $50.

      Does it matter if the interest was paid by the $50 or your longer-term debt? Or some of each? Not at all.

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    • eloquentz
    • Numbers Wizard (Accountant), Acoustic Artist (Musician) and Jill of all Trades (Wife & Mother)
    • eloquentz
    • 3 yrs ago
    • Reported - view

    You need to then budget for the $10 interest charge.  The money needs to come from one of your other categories.  You don't need to necessarily anticipate this amount (although carrying a balance, you will have this regularly).  Once you have a bit of history with YNAB under your belt, using the Reports feature to see what you have usually budgeted is helful. Or, click on the category itself in your budget and you can see in the side bar the average budgeted, average spent, budgeted last month, target balance etc.

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    • eloquentz  Which defeats the purpose. This month’s money has already been allocated. This interest isn’t payable until next month. 

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      • eloquentz
      • Numbers Wizard (Accountant), Acoustic Artist (Musician) and Jill of all Trades (Wife & Mother)
      • eloquentz
      • 3 yrs ago
      • Reported - view

      Coral Chef Not really. In YNAB, the due date is irrelevant. Expenses go through when they happen, not a month later when the credit card is due. The whole idea of the way it works is to ensure you have the money allocated already to avoid going further into debt.  

       

      If you don't recognize the interest when it happens and leave that category in the red, it will reduce your available to be budgeted in the next month.

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
      • 4
      • Reported - view
      eloquentz said:
      If you don't recognize the interest when it happens and leave that category in the red, it will reduce your available to be budgeted in the next month.

       

       Credit card interest is overspending on a credit card. It  is yellow and will be converted to debt. It's not red. It will not effect TBB.

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    • nolesrule  Thank you. That was the answer I was looking for. 

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    • nolesrule Next month when I go to budget, do I split that $50 payment between the CC and the Interest category?

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  • Hi Coral Chef ,

    You can handle that interest in two ways, which have both been touched on above. You can budget $50 towards your credit card category directly, and let the interest category remain yellow and negative (that carries over on your credit card balance), or you could budget $40 towards your credit card category and $10 towards your interest. Either way will still place the full $50 towards your credit card, it's just covering that Interest in its specific category rather than in the credit card category.

    For more information, our Help Docs will walk you through how to account for interest charges when you're carrying a balance on a credit card. :)

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