Credit Card Interest & Debt Avalanche

I'm currently working through a debt avalanche plan. I've added my credit cards to YNAB and have linked them to automatically import transactions. My interest charges recently came through, so I need to do something with them. 

Traditional YNAB wisdom tells us to budget for the interest using an Interest & Fees category and the Credit Card account as the Payee. Then we're supposed to include that interest in the actual payment to the credit card company. I get that, and it makes sense.

BUT—in a debt snowball or avalanche situation, the traditional approach is to pay minimums or close to it on most cards, then throw your extra money at one card (either lowest balance or highest interest depending on your preference.) In this situation, it's understood that the interest accumulates.

I also have all of my credit cards set up with automatic payments with the exact amounts I want to pay on them. I don't plan to go back in and pay extra on the interest, so it doesn't make sense to budget for that. However, I do need to account for the increasing balance on the card when the interest is charged. 

So what's the best approach here? 

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  • Don’t budget to the interest line item but have the interest charge allocated to the interest line (category balance will be negative). When the month rolls over YNAB will zero out the negative and add it to your credit card debt. 

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  • Here's the same effect, but doesn't wait for the month to look clean:

    1. Budget for minimums.

    2. Enter an interest transaction. It will appear overspent.

    3. Use the move money in the budget screen tool to cover the overspending with the appropriate card's category available balance.

    4. Repeat steps 2-3 for each interest payment. 

    5. Smile as the available to pay each card is still the minimum and the interest isn't looking annoying.

    Note: If you enter all interest transactions before moving the money, things may not line up until all of the money moving is done. As long as you're putting in the right numbers, just trust the process until it shakes out.

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  • A very simple option is to categorize interest to TBB. No budget manipulation, but this does slightly decrease total income in reports. Your call if this matters to you.

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  • capitalJ said:
    it's understood that the interest accumulates

    FWIW, interest doesn't accumulate. The minimum payment more than covers the interest when not using the card (which is typical).

    However, not using a card is a missed opportunity. You could be using the cash backing budgeted purchases to fund the payments for the non-target card. The money you would have directly budgeted toward the minimum payment can therefore be put toward the target card (accelerating its payoff).

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