Credit cards are an ingrained part of American culture. We love our credit card points! And there is zero shame in that game. Go on and brag about that hotel upgrade! I’ll wait.
However, one thing that we aren’t as familiar with is the concept of “credit card float.”
Credit Card Float
It’s important to understand what credit card float is and how it impacts your financial picture because it unknowingly happens to many people (even those who pay their credit in full each month)!
What does credit card float mean?
In short, credit card float is using current money to pay off old purchases (what’s on the credit card).
How it impacts your financial picture
It impacts your financial picture in regard to how much liquid assets (cash) you have available if needed.
Are you floating?
How do you know if you are experiencing credit card float?
Open your checking account.
Look at your checking account balance.
Do you have enough money in there to pay off your credit card balance + cover the rest of the month’s spending?
If you don’t have enough cash, you’re floating.
If you have enough cash, you’re not floating.
If you’re floating– don’t worry; it can be remedied.
How to Unfloat
When you’re riding the float, you are operating like so: spending → earning
When you’re off the float, you are operating like so: earning → spending
I’m going to go through a few options to get off the float, and I’ll list them from most to least aggressive so you can choose your own adventure.
Option One (Most Aggressive):
A surefire way to get off credit card float is by getting a month ahead with your money. When you’re only spending money you earned in the previous month, it is very easy to know how much you have available to you!
Step 1: Figure out how much inflow you have on average each month
Step 2: Save that much money in a savings account (consider if you can sell anything, pick up an extra project, or if someone gets paid bi-weekly–use their third check that comes twice a year)
Step 3: Only spend what you earned from the previous month
Pro Tip: Using a financial tracking app that connects to your bank accounts allows you to see real-time totals of how much you’ve spent in the month. It’s super slick.
Option Two (Medium Aggressive):
Stop using your credit card & start using your debit card for all purchases over the course of two to four months.
When you stop using credit cards, you are forcing yourself to spend what you’ve already earned.
Note: You may not be able to pay your credit card in full, so that’s why it will take a few months to really figure out your spending threshold.
Pro Tip: Don’t cut up your credit cards. They aren’t your enemy; you’re just learning how to use them in a more successful way.
Option Three (Least Aggressive):
Start utilizing a calendar-based spending plan/budget.
You can either use an online calendar or a paper calendar. Personally, I find a paper calendar easier to use in this scenario, and I rarely ever choose paper over technology.
Document which days you have money flowing into your personal checking account (not your business checking account) and approximate how much you’ll have. This is the perfect time to use your colored pens/pencils!
Example: If you pay yourself on the 1st and 15th of the month, the inflow on the 1st will be one color (e.g., blue), and your inflow on the 15th will be another color (e.g., green).
Then, find the days your bills are due. Again, I’m talking about personal bills, not business bills.
Here’s a quick brainstorm of things to look for:
Rent/Mortgage
Phone bill
Utilities
Loan payments
Credit card due dates
Streaming services
Example: Sticking with the theme of paying yourself on the 1st and the 15th: The bills due between the 1st and 14th will be blue. The bills due the 15th-end of the month will be green.
Take the items in blue. If you subtract your blue expenses from the blue inflow, how much money would you have left over for your discretionary spending? Is that enough to get you through those 15 days?
Now, do the same for the items in green.
This exercise will help you see how much you have left for all your lifestyle purchases (aka wants). Can you live off of that amount? If you want to stop floating, you’ll need to gradually reduce your discretionary spending until you’re able to pay off your credit card in full + cover a full month’s worth of spending with your total inflow.
You can take this one month at a time for a slower transition.
Pro-Tip: If you find yourself needing to cut out some discretionary spending, put your spending into categories—for example: Self-Care, Shopping, Entertainment. Then, rank those categories based on your values. Determining what’s most important to you will help you make decisions versus feeling like you’re being restricted.
For YNAB Users
If you don’t use this system and you’re interested in learning more, click here to learn more from my YNAB Review blog post. Otherwise, skip on down to the next section!
If you do use YNAB, here’s how they advise getting out of the float:
If your recent payment has turned your Credit Card Payment category red, you'll need to resolve that first.
Recognize that you have debt and may not be able to pay the card off in full going forward.
Commit to using the Credit Card Payment category to help you pay it off.
When assigning money for your upcoming expenses, be sure to assign some money to the Credit Card Payment category, too.
Always check the Credit Card Payment category before you make a payment—this may mean that you need to turn off automatic payments to the card.
You’re taking back control of this process, and you’ll pay the bill based on what you have set aside in your budget. Once the cash in the Credit Card Payment category matches what you owe on the card, you're all set to pay in full and turn automatic payments back on!
The Bottom Line
Whether you are paying your credit card in full or not, it’s possible you are experiencing credit card float. If you followed the “Are you floating?” steps and came to the conclusion that you indeed are, there are actions you can take to get back to a healthy space with your credit cards.
If You Don’t Want to Do It Alone
If you are looking for a way out of the credit card float and you’d like some professional guidance on how to get there, I’d love to see if we’d be a good fit. Book a 15-minute Chat here.
Here's to you,
Melissa Mittelstaedt
Money Coach | Accredited Financial Counselor®