Question about a credit card account
Hello,
I have a question about credit card debt. Could you please tell me if the following steps are correct?
1. I added a credit card account in the budget section (and not the tracking section) and its total balance.
Let's say - 5000$ for Visa.
2. In the "credit card payments" category, appears the name of the Visa account. Now, in that category, do I budget for the total amount Visa will take from my account (150$) at the end of the month, OR do I put the real amount I'm paying towards the amount I owe to Visa (100), and budget for the interests (50) separately in another category I create?
3. Arrives the day when Visa takes the money from my account: do I record that transaction as it is, or do I split it in two? (100$ and 50$ of interest). OR do I transfer the 100€ to the Visa account, and record the interests as a regular expense?
Thanks a lot for your clarification! Still learning.
All the best,
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Recommended practice is to budget for interest separately, as then the payoff goal calculations will work correctly. Progress out of debt is obvious, by the fact something is budgeted to the payment category..
Many people will just leave interest unfunded -- which will then go overspent -- in the interest of easier budgeting. The con is it's not obvious whether you're making progress, and the Payoff goal suggestions will be too low.
An interesting middle ground is to budget everything to the payment category, then cover the overspending when it occurs from that payment category. This turns off the warning, and shows the real progress.
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dakinemaui Yes, I will budget for the interests too. That makes a lot of sense.
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Dan said:
do I record that transaction as it isJust a transfer/payment. The interest expense will be it's own transaction.
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dakinemaui But only the real amount you are sending towards the total debt must be transferred to the credit card account, correct? Interests must be recorded as a separate "expense", right?
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Dan Yes, transactions should match reality. Don't forget that you will later reconcile the transactions in YNAB with your bank website or statement.
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dakinemaui Thanks
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dakinemaui In case of a loan (so money that is frozen in a way), the account should go into "tracking" , right? How is the procedure different from a credit card setup then?
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Dan if this loan is with a bank that provides statements, I wouldn't even make a Tracking account for it. Just treat it like another bill with a category to reserve the payment amount.
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dakinemaui Thanks, sorry, still a bit confused here. I get the idea that we must budget for the interests separately, but when Visa gets the money from my bank at the end of the month, it's in one chunk. So how should I record that expense on my actual account? Split the transaction in 2 even though there was only one transaction happening ?
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dakinemaui But YNAB doesn't let me split (no category needed). I think I need some vitamine C here, or a new brain :)
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dakinemaui One solution I found is to pay the full amount to the credit card account (the amount + interests) and then pay the interests from the credit card account and not the checking. Does this makes sense?
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Dan Yes, enter the interest as a charge on the credit card. The payment from checking to CC doesn't need a category or a split.
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Move Light Sound Life Thanks, I did that :)but still a bit confusing to me what is the amount I should budget for in credit card payment category
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Move Light Sound Life dakinemaui When I record a full Visa transaction on my checking account, let’s say 150$ (100 real payment towards the debt + 50 interests), I operate an internal transfer from my checking account to my Visa account, therefore I have to budget for 150$ in the credit card category, right? If I do budget for 150, then how can I also budget for the 50$ interests on the interests & Fees category?
That would mean that I’m budgeting twice for those same interests. What am I doing wrong?
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Dan See my first post. What matters is the Available covers your transfer amount. Money for the payment is made Available via budgeting AND activity.
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Dan said:
If I do budget for 150, then how can I also budget for the 50$ interests on the interests & Fees category? That would mean that I’m budgeting twice for those same interests.No, it means you make $150 progress out of debt. Your call if other demands on your money allow the larger outlay of cash ($200 total).
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dakinemaui But since 50$ are interests that I pay to buy "time", only the 100$ have an impact on the total I owe, right?
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Dan I can't answer that until you state whether you also budgeted for the interest in the interest category. There's also a timing issue, as the interest expense that hits the current month occurs after you make your payment near the due date.
Look, let me simplify:
- If you use the Payoff Goal, budget for interest in its category, ideally in advance of the statement. (Use last month's value as an estimate.)
- If not using the Payoff Goal, budget to the Payment category and ignore the overspent interest category.
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The interest charge is just like any other purchase: an outflow attached to a specific category.
Budget for the interest in the interest category; YNAB will automatically move the money to the credit card payment category for you.
Then budget the difference between the interest charge and the actual payment amount, directly to the credit card payment category.
The payment is a **transfer** from your checking account to the credit card account, for the exact amount of the payment, with no category required.
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Caveat to the above: the math is easy if you are paying a fixed amount over the interest charge, i.e. interest +$100. Less so if, say, the interest charge is $27.46 and you plan to make the minimum payment of $111. Fortunately, the budget box acts as a mini calculator, do you can type "111-27.46" and YNAB will budget $83.54 for you.
dakinemaui 's "interesting middle ground" is actually the route I most often took, but sometimes people don't realize you can do the math right in the budget box.
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Vibrant said:
The interest charge is just like any other purchaseRepeating this. You simply bought more time.
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Dan said:
That would mean that I’m budgeting twice for those same interestsIf you budget the $50 to the interest category, YNAB will move that $50 for the interest transaction from the interest category to the CC payment category. If you also budget $150 directly to the CC payment category, then your category available should show $200. If you only want to send $150 to the card, period, then yes, you'll want to only budget $100 to the card and let the $50 come from interest.
If you have other spending on the card as well, as long as it's in budgeted categories, YNAB will also move that money from its original category to the CC payment category, increasing the Available to pay. If you want to also pay down debt, you budget the debt paydown amount to the CC category directly. Is that your situation?
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Thanks to all of you for your precious advises! dakinemaui Move Light Sound Life Vibrant
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Dan, check out Nick True- Mapped Out Money- His credit card guide for YNAB may answer all your questions regarding how credit cards work. https://youtu.be/2Ix0Jibc0Lw
