Using credit cards to implement budgeting when you don't have income

Question

My spouse and I are between jobs right now as we are transitioning to new career situations. Our financial situation is stable and our prospects are good, but we will be without steady income for a few months. In order to keep our finances stable, we decided to implement a family budgeting plan to help us not accidentally overspend without having to do tedious bookkeeping. It seems like a good idea to have several credit cards, each one for specific categories of spending, with its own tight limit. This way we can define budget targets at a high level without having to micromanage our spending.

The issue here is that we currently have a limited number of credit cards. My go to credit card is one that gives me 6% cash back on most purchases and is also otherwise very convenient. Due to my responsible behavior, the company granted me a limit equivalent to about 6 months' worth of my income. I rarely approached this limit. I can ask them to lower the limit of this card dramatically, so I can use it as my everyday spending card, and they will surely agree. Unfortunately in doing this I would be losing a significant source of credit for emergencies. If I suddenly decide that I need credit, and ask them to increase my limit back to its current level, I think they will refuse because I no longer have the income that originally justified the high limit.

I can simply set aside my 6% cashback card aside as an "emergency card", and buy some reloadable gift cards with a small limit to use for everyday spending. The problem there is I would be giving up my 6% cashback, and at best I could probably get 2% cash back.

The ideal situation would be to have a credit card with large limit, cashback irrelevant, that is only used rarely for significant planned purchases. Then I could lower the limit on my 6% card to use daily, and I would still have the other card in case I suddenly need money. But wouldn't it be very difficult to apply for a new credit card when I don't have any income, even though my credit score is very good?

However, the situation is currently lopsided in that I have two cards:

• One card with no cashback that has a limit of 3x my former income.
• One card with 6% cashback that has a limit of 6x my former income.

By the end of the year I am likely to have an income 3-4x of my former income. But getting to that point without straining our savings would be much easier if I could restructure my credit card situation. Is it worth for me to try and apply to banks for credit cards, or should I just stop worrying about the 6% cash back for now, and just use the reloadable gift cards?

As a remark, we have liquid assets that could easily cover about double of all these combined limits, as well as illiquid assets of similar quantity. It would just be nice to have the option of borrowing instead of dipping into the assets.

Addendum in Response to one of the Answers: One answer described what I proposed as "playing games". However, the money we managed to save up was saved largely by playing such "games". At times when we stopped playing these games, we went grossly over budget.

Answer 1

Some people can only avoid impulsive overspending if they have the risk of a declined card hanging over them. But if you have managed to save up ten times your income without playing such games, then plainly you're not one of those people.

Spreading your spending across several cards can be a useful way to track your budget -- it's a simple low-tech way of getting different expense categories tallied separately without needing to type transactions into a spreadsheet (or, worse yet, a ledger) day for day. But that has nothing to do with the credit limit on the cards, as long as there's room for the expenses you want to use them for.

After all, if you're on your way to overshooting your budget, you'll want to know that before you go shopping so you can adjust your spending. It's too late to find out when you're at the checkout with a declined transaction because you've hit your self-imposed limit. So you'll want to track the balance on the card from home anyway at least once a week, and you're perfectly able to compare that balance to whichever amount you've budgeted for such-and-such expenses, even though the card itself has a higher spending limit.

Thus, there's no reason you'd need to artificially lower your credit limit before you implement your plan.

Infrequent large expenses that you're accounting for individually in the budget you can still put on the most advantageous card no matter what's your strategy otherwise. They're infrequent, so when they happen it shouldn't be much of a chore to adjust the target numbers you compare to when you check your balances.

Answer 2

Why do you want the bank to lower your credit limit? If the limit is more than you need, just ... don't run the balance up to the limit. What would force you to spend more just because the limit is higher? If you don't want to let the balance on this card get above, whatever, say $2,000, then just ... don't run up the balance past $2,000. Who cares if the limit is $20,000 or $100,000 or whatever?

If you don't have any income, how are you paying the bills on these cards? If you're pulling money out of some savings or investment, why not just use the savings money for purchases and skip the credit cards?

How would having more credit cards help in budgeting? Well, I suppose these days where you can see your credit card balance by going to a web site, you could use the web site to tell you how much you've spent in each category. But you could accomplish the same thing with a spreadsheet.

I find that having too many credit cards is confusing. I just got burned on that recently. Between my wife and I we got 3 American Airlines cards to take advantage of a "bunch of free frequent flier miles as a sign up" bonus. 1 of the cards automatically put me on paperless statements, and I got confused and thought the emails were for a different card. So I didn't pay the bill for 2 months. Fortunately I had set up an autopay, so I didn't get slammed with late fees, just a bunch of interest when I had plenty of cash that I could have paid the bills no problem. My point being, if you have too many cards, you may lose track of them, and forget to pay a bill on time. I am moving back to using just 2 cards, one for me and one for my wife, to avoid this problem. (It's a pain when you have things auto-billed to multiple cards.)

Answer 3

The OP says:

As a remark, we have liquid assets that could easily cover about double of all these combined limits, as well as illiquid assets of similar quantity. It would just be nice to have the option of not borrowing instead of dipping into the assets.

The OP and her spouse are going to be without income for several months, perhaps six months, until the end of 2019. There is no way they can cover even basic necessities with zero income without dipping into savings, or financing themselves via their credit cards or borrowing in another way. Shuffling the credit cards will not, by itself work. They will just accrue credit card debt, which is the most expensive kind of borrowing.

Of the three options, dipping into savings -- and their savings are considerable -- is likely to be the cheapest option. Interest on credit card debt is far, far higher than interest on savings accounts or money market funds. Borrowing from a bank or other lender (other than close family) is also likely to be more expensive than dipping into savings, and they might not be able to get a loan with no income.

However, if their savings are CDs with a penalty for early withdrawal, that would complicate the calculation, as would stocks that are going up. But before deciding not to dip into savings, the OP and her spouse need to do the calculation on the relative costs of dipping into savings, piling up credit card debt, and borrowing from some lender.

I agree it would be unwise to bring the savings down close to zero, but the numbers the OP gives indicate that is unlikely.

Answer 4

I ended up finding a reasonable solution that was somewhat different from what other answers suggested. I won't accept my own answer out of respect for the other contributors' helpful responses. But I wanted to share in case it is helpful to future readers.

It turned out that my arrangement with the credit card company is more precisely called a credit account. This credit account has an associated main card, which I had been using as my everyday card, on which it is possible to spend the entire limit. It is not possible to place any spending restrictions on the main card besides lowering the credit limit (which it would not be possible to increase again without the company's approval).

In addition to the main card, the credit card company issues additional cards that can be in someone else's name. Spending on these additional cards still counts towards my credit account, ie. they are not actually separate credit cards. Combined spending between the main card and all the additional cards is subject to the credit limit. However, it is possible to easily put arbitrary spending limits on these additional cards. The spending limit is easily increased or decreased at will by the account holder (me) and does not require approval. If an additional card reaches its spending limit, it will stop working for that billing cycle, but if the credit account has not reached its credit limit, the main card can still be used to spend money (eg. for emergencies). The non-obvious thing I discovered is that it is possible to issue an additional card for myself, and that way I can limit my own spending on that card.

So our solution was to set a "monthly budget" that we felt was reasonable given our expenses and savings, get "additional cards" for ourselves and put that budget on them as a spending limit. So long as the "additional cards" (confusing name - it is actually our main card in the sense that we use it every day, but it is considered "additional" by the CC company) are working we can safely assume we're within budget. Meanwhile, we get to take advantage of the benefits of our best credit card for the majority of our spending.

Occasionally a major purchase may be needed that would exceed or strain this budget - for example, something like urgent car repairs is worth making an exception for. These purchases can be made on the "main card" so that they do not impact the monthly budget (and accordingly they are not really monthly purchases, but one-time expenses). One might question how this is a barrier at all, given that you can just "cheat" by using the main card all the time. Well, for one, only one person can have the main card. Besides that, the main card generally stays at home, not in the wallet, so it wouldn't be as tempting to go outside the budget in this way.

Because of the way the spending limits work, with this system it's not possible to carry over unused budget to the next month. However, it is possible to just buy some $500 gift cards to accomplish the same thing.

What I found doesn't work:

• Non-reloadable gift cards - unfortunately these only come in $500 and it is a hassle to keep buying new ones repeatedly.
• Reloadable gift cards - have significant fees, poor terms, and often require that autopay be charged directly to a bank account and not just a credit card.
• Secured credit cards - terrible terms, and something about the bank charging me fees to lend my own money back to me just doesn't sit right.

Eventually, I think the ideal situation would be for my spouse to get his own credit account with similarly good benefits, and use an additional card in his own name from that account. This way we would better take advantage of our credit. But currently this isn't feasible, because CC applications seem to hinge entirely on income and disregard savings.

To be clear: We both understand how credit card debt works and we know what we're doing. Please do not misinterpret this question to mean that spending beyond your means via credit cards is desirable. You should never borrow money on a credit card (ie. not pay it off on time) unless you either have a good plan for paying it off eventually, or you have a very good reason (eg. you would literally die if you didn't borrow the money).