Credit card use

Throughout this process of paying off the debt there’s one cardinal sin we’ve always broken: we still use a credit card for regular monthly purchases which we pay in full every month. There are several justifications for our breaking the no credit rule and I’m sure most people will disagree with our decision. The method has been working for us for years, until recently. Before I get into our current plight, let me at least explain our justifications for continuing to use the credit card:

1.   It’s easier to pay one lump sum for a bunch of the little bills we pay each month. Our internet, phones, Netflix, medical debt, and utilities are all set up to auto-pay on the credit card. Since all these bills pretty much the same from month to month, it’s easiest for me to budget one larger payment and only have to remember to set up one payment each month.

2.   We get cash back rewards. It’s not much (2%) but right now, with such a slim income, any little extra helps.

3.   We also put the big items we’ve saved up for on the card to get the extra cash back.

4.   It gives us a wee bit of security in addition to our emergency fund. We pay the cc bill on the day it is released so there are several weeks of padding before the actual due date in case something comes up where we need to put that money elsewhere while we hustle up the cash to cover the unexpected instead of hitting our e-fund.

So now our current situation:

Earlier this year, we decided that we should try out paying for other things besides those listed above with the card to maximize the cash back. So we started putting everyday expenditures on the card like groceries, gas, diapers, etc. The idea was that we would take our cash for those budgeted items and put it in a reserve account so we could cover the expenses when the credit card bill was due. This worked reasonably well at first but it was complicated for me to keep track of everything since these other budget items where often variable and purchases are frequent and throughout the week. I was spending way too much time trying to figure out what expenses had occurred since the last time I transferred cash.  Also, psychologically, I did not like the feeling I got looking at a steadily increasing cc balance each month, even though the cash was there waiting to pay it off.

After a few months, I also realized that we were spending a little bit more on the credit card than we were setting aside and had been “dipping into” the next month’s cash reserves. The date that we were paying the card was also slowly creeping towards the due date. Basically, our little experiment failed. We are ok at paying set amounts and for large, saved for items on the cc but the smaller day to day stuff leaves too much room for error and overspending. So we’ll be transitioning back to our old method which will take a couple months since we overspent for several months.

Besides the basic lesson that making our finances more complicated like this DOES NOT help in the long run, there are also a couple other issues at play here that I’ll need to examine.

-    Were we going over budget each month because the cc was tempting us back to our old ways and giving us false security to overspend? Yes, I think we were guilty of this for at least a little bit of the overspending.

-    Were we going over budget each month because we don’t have enough budgeted to cover our expenses? I think this is a major factor, we’ve been so focused on “paying off the debt” that we are putting ourselves in a situation where we can’t cover the regular expenses.

-    Should we have dipped into the e-fund for some of the things that went on the cc? Yes, we definitely had a few totally unexpected things come up that should have been e-funded. We need to get comfortable with the idea that the e-fund is there to help us when we need it not some sacred account that’s untouchable.

Moral of the story, it’s time to get back to basics, assess the budget and simplify the finances.