4

I have the bad habit of carrying a balance on my credit cards and paying monthly out of my bank account toward those cards.

I was talking to a friend recently about this, and he brought up the idea of paying a large portion of my pay check toward one of those cards, and then using that card to pay for expenses that I would normally pay out of my bank account.

I know there are some benefits to this, such as building up rewards points, and reducing the average daily balance on the card used for interest calculations. I'm positive that this is the best path to take, I just want to understand it better.

Are there any cons to this plan? Will doing this help my credit? Will this help pay down my balance quicker than just paying a fixed amount toward the card each month? (for the record: I pay larger amounts than the minimums each month.)

5

No, but as long as you are disciplined to spend each month less than the payment you applied to your card. If you can do that - then that's the way to go and reduce (and ultimately eliminate) your balance.

If you're not disciplined enough, and using credit cards makes you spend more than what you have and/or doesn't allow you reducing your balance - then don't do it, keep your cards in the drawer until they're completely paid off.

In either case, large portion of your paycheck should go to paying off the cards, because its expensive. But if you're using your credit cards for day to day expenses - this portion should be significantly larger, to cover for those expenses, and should include the part you used to keep on your checking account to cover for those expenses when using the debit card.

  • as @James-Lawrie points out, overdraft fees are a big disadvantage of using a debit card. If I was in this position I would probably try to be cash based only until the card was paid off or until I had enough of a cushion in the debit linked account that an overdraft was not a possibility. – Pablitorun Jan 18 '12 at 23:38
  • Expanding upon the "spending more", studies have shown people spend about 10-15% more when using cards (credit and debit cards) than cash. – ChuckCottrill Apr 9 '14 at 14:48
4

In your words, you have a "bad habit." This is a habit you need to break. However, the large balance on your credit card is the symptom; the problem is spending more money than you take in.

Following your friend's advice won't address the problem. You have a large debt, and you have upcoming expenses. Your friend would have you pay on your debt first, and then continue to add to your debt by financing your everyday expenses. This won't help you break any habits.

Instead, you need to budget your income and commit to only spend money that you have. My advice is to stop using the credit card altogether, and pay for your everyday expenses with cash or check. Include your credit card payment as an item in your budget, and work on paying them as much as possible after you've paid your other monthly expenses. After your credit card is completely payed off, then you can decide if you are able to use it responsibly (pay it off every month) or if you should just stick with cash.

3

You currently have a problem: you owe money to your credit card company. You spent more money than you had. While you are paying more than the minimum, it might take years to pay it off.

You are now hoping that by sending money to the credit card company in big chunks each month, and then putting basic expenses on the card, you will in most months pay down the balance when you don't spend very much.

Now you will change your average daily balance, but unless you are disciplined in your spending, your balance owed might grow.

You also risk putting a big chunk of money on the card and then needing it for something else, but no easy way to transfer it. You could use one of those special checks they give you, but those might have costs and limits.

  • 1
    If a Credit card company sends you a check you did not ask for be wary of the terms. We have received some that indicated low or no interest... but that was only if the complete balance was paid within 90 days otherwise it converted to 29% retroactively. I am not sure how the payments would have been applied but when I read the terms I shredded the checks immediately. – user4127 Jan 19 '12 at 14:41
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Since the choice is between credit and debit card, I assume you have the cash to pay credit card bills in time.

Pros:

  1. It builds credit history and reward points.

  2. You earn interest on your debit card balance without paying any extra money. Negligible but still...

  3. You know where, and how much, you are spending at the end of the month. I got to know my fuel bill only by my credit card. Paying in small amounts lulls our thinking. For me, this is the biggest advantage.

Cons:

Temptation! You have to restrain yourself every month.

1

Paying everything via credit card gives you extra payment protection, protection from overdraft fees, and loyalty points. It also means that the money is in your account instead of theirs for the 30 days - the interest you accumulate will probably be negligable, but it's nice to have it as a safety buffer if you absolutely need it.

There are no drawbacks to this if you pay the balance every month. If you have a running balance on the cards there are two issues. Firstly, it's harder to do (I do it by moving an amount identical to each credit card charge into a savings account, then paying that at the end of the month plus the minimum payment (and a little more) - but I have 0% on everything in there so it's no problem). Secondly, you have to be careful about different rates on the card, so for example if you have a balance transfer of £2000 on there at 0%, and then you stupidly take out £20 at the ATM at 40%, typically all of your payments go to the lowest interest amount so you will accrue interest on that £20 until you've paid off the £2000.

Look at snowballing your debts - pay the minimum payment on each, then whatever you can afford on top off the credit card with the lowest balance (or the highest reward points as you'll be using it a lot). Once it's clear, set the direct debit to full payment and use it for everything (but like I said, keep money aside for each payment to keep yourself in check). Then pay everything you can off the next smallest card.

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    I think snowballing is what got the OP into this position to begin with. Note that the OP already carries balance, and is trying to pay it off, not just starting using credit cards from scratch. – littleadv Jan 18 '12 at 18:33
  • your answer is missing something because you missed that OP already carries the balance. I did give you a +1 though for pointing out the one potential drawback for using debit cards....overdraft fees. One overdraft fee in a month is more than equal to the extra interest of having those purchases added to the daily balance of the credit card and is an excellent point. – Pablitorun Jan 18 '12 at 23:35
  • +1 for noting that payments go toward the lowest interest rate. You can take a balance that is manageable at its current (promotional) rate and convert it to a much higher interest rate with new purchases. – user4127 Jan 19 '12 at 14:36
  • @Chad Didn't the CARD act change the fact that payments go toward lowest balances first (or am I remembering incorrectly?) (I'm in the USA) – Kyle Trauberman Jan 19 '12 at 17:45
  • Kyle is right, payments beyond the minimum are now applied to the HIGHEST rate balances. – Sean W. Jan 24 '12 at 18:12
0

The situation in a more ideal sense is that you have a credit card - for example an $800 credit line. Instead of using your debit card you use your credit card. For the first month there is not a difference. You'd spend $800 out of your checking account no you are spending $800 on credit. What will affect you is what you do at the end of the month. If you were self controlling you'd use the $800 in you checking account to pay the $800 you spent on the credit account. This allows you to earn reward point, air miles, cash back ect. The issue for most people is they spend $800 on credit and then some or all of what is in the checking. If you do that you have to make the monthly payment which is part principle (what you spent) plus interest (what the issuer is charging you to borrow the money). Your bill will tell you how long it takes to pay back the balance only making the minimum payment.

Most people try this approach to earn rewards and build credit. Of what I know this builds credit slower. A card issuer is in the market to make money and they do that by charging you interest. If you are paying the card in full each month then you are not paying interest. The way this affects your credit score is you appear to not be utilizing you credit because part of your score is credit utilization and that is the balance of the card when it is reported to the credit reporting agency. It will report that you have a credit line of $800 but a balance of $0 so it looks like you are not using the card. You will however have a good payment history and that does help build credit also.

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