Unwinding Credit Card Cash Flow Problems

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I got my first credit card from my bank when I was in college and used it to help build  my credit before I headed into the real world. I think it had a $3,000 limit on it at the time. I was working 15-20 hours a week basically for spending money (I'm not a natural saver). Typically, I would charge a few hundred dollars a month and pay it off. No interest paid.

My second credit card helped me buy Kelsey's engagement ring. After shopping around for rings and finding the perfect one I had to find a way to get it now. I hadn't saved any money for a ring, but I knew then what Beyonce would write about a few years later... "if you like it then you should have put a ring on it..." I didn't want to be in that "should have" category...

So, there I was sitting in the Jewelry salesman's office talking about finance options for the ring. I'm just a kid in college, in love with a girl, who wanted to give her the ring she deserved. His solution was a six month no interest credit card. But, I couldn't get a high enough credit limit to pay for the ring without a co-signer... thanks Mom!

The ring cost north of $5K. So, I basically worked the last semester of my senior year trying to pay off that ring before that interest kicked in. It was worth it, but I wish it didn't have to be that way. I wish I was a saver at that point in my life. I wish I had discipline with my money. I wish I had a plan and purpose for what I was working for. But, I didn't, and at that point, a dangerous solution presented itself. 

Credit cards allow us to buy things now that we should pay for with cash. In this day and age, instant gratification lures us to make poor choices without considering the long-term consequences. I was preparing to graduate college with $30K in student loans, no job at the time, and I'd just picked up $5K of debt I didn't have the income to pay back. 

Are credit cards helping you increase your net worth or just your lifestyle?
— Eric Williams

The credit card company could have won big in this case. Luckily, I had a few months post-graduation with a full-time job that paid decent to pay off that ring before the interest payments started. (And having three college buddies in a two bedroom apartment splitting bills helped too).

Credit cards require a level discipline and structure to ensure you are using them in a way that will not hurt you in a pinch. The pinch is where the credit card company wins. When I was using a credit card, I thought I was so smart. Getting those rewards! Building that credit! Paying it off every month! #Winning

The problem came in a month we spent an abnormal amount of money. We ended up having to pull money from our savings to cover the bill. We didn't pay interest, but if we didn't have the savings we could have started a downward spiral of credit spending causing a lot of stress for what? A weekend of shopping? Nothing that lasted. We were not living within our means and it almost burned us big time. 

What happened to that savings? We had to take money from ourselves that was supposed to be for something else. Lifestyle got in the way of our long-term savings. This is the point where credit cards become very dangerous. Almost a gateway drug for frivolous spending. 

It set a tone for how we handled paying for things we wanted now that we couldn't afford to pay for with cash. Furniture for our new home (which we were in over our head with as well), a car loan, and a king-sized bed.

When we finally learned what a budget was and how to create a plan to get out of debt, we decided that credit cards were not going to help us get to our goal. It proved to be a difficult cash-flow process to unwind.

Credit Card Cash Flow Problems

When you pay for all of your lifestyle expenses with a credit card, you are typically a month behind your paychecks. You put things on your credit card in December, but you've not yet received the income to pay for them. Without a significant surplus in your budget, this can be a hard process to change. There are a few ways to undo this process...

  1. Use savings to pay off the credit card. And then stop using the credit card.
  2. Stop using your credit card and pay off your balance through a debt-snowball.

Either way you do it, it will require living below your means and commitment to stop using the credit card and start using cash/checking/debit card only. 

Once we decided we were going to stop using our credit card all together, we used our savings to catch us up a month. At that time, it took us about $3,000 to pay off the credit card and have enough money in our checking account to pay for the rest of the items on our budget. 

We were one month behind in expenses. So we needed to pay for two months expenses at one time to make the switch to cash/checking/debit card spending only. But if you don't have the savings to do that, you can follow step two from above to accomplish the same goal. 

Quick Test For Responsible Credit Card Use

If you think you are using your credit card responsibility, but don't have a budget, here's a question that will help you determine if you need to rethink your credit card cash flow.

Do you have enough money sitting in your checking account on any given day of the month to pay off your entire credit card balance?

If the answer is yes, and you'll still have enough in your checking account to pay for the rest of the month, you are using your credit card responsibly.

If the answer is no, then your path to changing your credit card cash flow process will be more difficult. You can do it, but it will take more effort and creativity. 

The Rewards!!!

The rewards offered for using your credit card are specifically designed to help you spend more money. If you are deciding whether to buy something or not, and a little Samuel L. Jackson voice in the back of your head is saying, "What's in YOUR wallet?" It will be all too easy to move forward with that purchase, because it will help you get that reward.

So, you might spend $100 on something you didn't need for $3 in rewards. Read that again. That's a generous 3% cash back you might receive on qualifying purchases. If you are a target Red Card holder (they do have a debit card version that we use). You get 5% off right at the checkout. So, we save $5 on a $100 purchase. Better, but if it alters our spending decisions and causes us to spend $95 we otherwise wouldn't have, it's not worth it. 

Managing Credit Card Usage

If you have credit card debt that you are working to pay off, or just want an easier way to manage your credit card usage, I suggest using a budgeting tool that helps you accurately track your progress. YNAB does this really well

Using a checking account only would be the simplest way to manage your cash flow, but if you are set on using credit cards, pairing it with YNAB will help you track your goals. It tracks both your debt balance on the credit card that you are trying to pay off, as well as current month additions to your credit card balance.

This helps you instantly know if you are going over budget while using your credit card responsibly. If you don't have a budget helping you keep your spending on track, it's proven that we end up spending more using credit cards vs. using cash.

If the budget is set at the beginning of the month and the budget is used to guide your spending throughout the month, you should be able to stick to your budget and not add to your credit card balance. 

This of course assumes that you have goals, are committed to paying off your credit card debt, and are living below your means. Having a credit card is not evil, but it does bring on spending temptations, and one of the biggest keys in changing your financial situation is being aware of your spending habits. You can't get ahead if you don't trust yourself. And sometimes that means changing things up. 

For us, we didn't trust ourselves. It seemed too easy to get caught in the moment at a store knowing our credit limit and the ability to push the payment decision down the road, so we decided to pay off our credit cards and cancel them. It helped create some momentum as we looked forward to attacking the rest of our debt

Do you use credit cards? How do you manage your spending and/or budget while using credit cards?