Cash, Credit Cards, Debit Cards, & Other Financial Issues

[jedikaiti]

I usually assume Option 2 - whatever the statement balance is. Something that gets you any applicable rewards and no interest charges.

[turtleIScream]

One question I always have when topics like these come up is what people mean by "paying off" the credit card each month.

I know that just about every credit card I've ever heard of gives you (essentially) three options when the bill is due. Just as a hypothetical, let's say that I have a credit card with a $500 limit. My minimum payment is $10, and I get each bill for the previous billing cycle two weeks into the next one. I spent $250 during the last billing cycle, so my bill is for $250. Since that billing cycle ended, I have put another $100 on the card, so my total charges equal $350 when I actually get the bill.

Option 1 is to pay something between $10 and $250, which would mean interest on the difference between $250 and what I paid. Option 2 is to pay the statement balance of $250, which results in no interest charged. Option 3 is to pay everything at $350, which also results in no interest charged.

So when you talk about paying off the credit card each month, are you talking about option 2 or option 3?

Personally, I always pay the statement balance. I've never been charged interest or paid any sort of late fee. I've had the card for about 8 years and I have never seen the limit change except to go up. Granted, it is my only credit card and I don't tend to use cash, so I put charges on it at least every other day or so.

We usually do Option 2 - no fees, and we get the extra float. We have once or twice paid down the actual accrued balance; I believe we had very large reimbursable purchases that significantly cut into our credit line. Using your numbers, if our normal monthly credit card expenses are $200, with a credit limit of $500, we should be fine using Option 2 for paying our bill. But if we have a month with $400 worth of expenses, we will run out of credit line before the next billing cycle. We now have fairly high limits, easily 3-4 times our usual monthly charges, so that is no longer an issue for us.

[Redsoil]

That seems so strange to me, that banks would cut your line of credit simply because you're not using the card regularly, or paying it off each month in full.

I do both, and have several cards with varying limits (one of which is for online use if needed).  The banks keep sending me forms to RAISE my credit limit on each card!  (So apparantly the "land down under" really does do things backwards!)

[KenveeB]

One question I always have when topics like these come up is what people mean by "paying off" the credit card each month.

I know that just about every credit card I've ever heard of gives you (essentially) three options when the bill is due. Just as a hypothetical, let's say that I have a credit card with a $500 limit. My minimum payment is $10, and I get each bill for the previous billing cycle two weeks into the next one. I spent $250 during the last billing cycle, so my bill is for $250. Since that billing cycle ended, I have put another $100 on the card, so my total charges equal $350 when I actually get the bill.

Option 1 is to pay something between $10 and $250, which would mean interest on the difference between $250 and what I paid. Option 2 is to pay the statement balance of $250, which results in no interest charged. Option 3 is to pay everything at $350, which also results in no interest charged.

So when you talk about paying off the credit card each month, are you talking about option 2 or option 3?

Personally, I always pay the statement balance. I've never been charged interest or paid any sort of late fee. I've had the card for about 8 years and I have never seen the limit change except to go up. Granted, it is my only credit card and I don't tend to use cash, so I put charges on it at least every other day or so.

We usually do Option 2 - no fees, and we get the extra float. We have once or twice paid down the actual accrued balance; I believe we had very large reimbursable purchases that significantly cut into our credit line. Using your numbers, if our normal monthly credit card expenses are $200, with a credit limit of $500, we should be fine using Option 2 for paying our bill. But if we have a month with $400 worth of expenses, we will run out of credit line before the next billing cycle. We now have fairly high limits, easily 3-4 times our usual monthly charges, so that is no longer an issue for us.

Option 2. Paying off the total charges for the statement month. (Well, in my case, usually paying off a nice round number  just above the total charges, for easy balancing. So if I owed $1083, I'd pay $1100.)

[siamesecat2965]

That seems so strange to me, that banks would cut your line of credit simply because you're not using the card regularly, or paying it off each month in full.

I do both, and have several cards with varying limits (one of which is for online use if needed).  The banks keep sending me forms to RAISE my credit limit on each card!  (So apparantly the "land down under" really does do things backwards!)

They were doing that left and right, a few years back, when the economy was tanking. My guess is, they werne't making any money from interest on balances not paid off, so they cut credit lines. I also think a lot of it had to do with the amount of credit extended. Prior to that, banks were extending ridiculous lines of credit. 

I know me personally, if you added up ALL my credit lines, it was well over 100K. And at the time,  I was making maybe half that, so I'm sure there were a lot of other people out there in the same boat.  Not aht I would ever come close to using that, but it was there. It was kind of scary, actually.

I think things are improving; the store card where I work recently changed banks, and my LOC went from piddly to 5 times what it had been, without my even asking for an increase.

[Shalamar]

Several years ago when my husband and I were spendthrifts, I used our line of credit to "pay off" my credit card on a regular basis (reasoning that the LOC interest rate was much lower than the Mastercard rate, so I was doing the smart thing!  Yeah, not so much).  One day, when I tried to do that, I was told that I'd reached the limit of the LOC.    The limit was $25,000.  Yikes.

That was actually a good thing, because it finally woke me up to how terrible our spending habits were.  I found us jobs delivering papers in the morning to make some extra money.   That, combined with using every spare bit of cash we could muster, got our credit cards and LOC debt paid off in a year and a half.

Ironically, the bank raised our LOC limit shortly after that, and it's currently at $45,000.  No thanks!

[oceanus]

When the bank raises the credit limit, people often see it as a pat on the back/gift/something to brag about.  It’s not.  It’s just telling you how much debt you have the authority and permission to rack up – and pay back, with interest.

[Shalamar]

I remember reading a book about money management a couple of years ago - it might have been by Dave Ramsey, or maybe Gail Vaz-Oxlade.  The writer said that he/she had a client who was absolutely terrible with money, but she needed a loan.  The writer said "Okay, but ONLY get a loan for the amount you need.  Don't let the bank talk you into getting a bigger loan, because you know what you're like - you'll spend it all and get into huge trouble."  The client agreed and went to her bank appointment.

After the appointment, she called the writer and said happily "I got a loan for $25,000!"  "WHAT?  You only needed $5,000!"  "Oh, I know, but the young man was so nice, and he made so much sense, so I decided to get the bigger amount.  I'll be fine; don't worry."  She wasn't.

[Cat-Fu]

One thing to keep in mind is that carrying a balance on your CC (that is, paying a portion or the minimum for a couple of months) makes the CC companies more likely to increase your available credit... which improves your FICO score. Not having credit cards tend to be viewed as a higher risk than a person who manages credit cards responsibly (having a low credit utilization ratio).

Generally speaking, I tend to use my debit card more often because it's easy to forget to pay off the CC. I do a lot of online purchasing, and I prefer to use PayPal—it's actually a pretty good way to protect your CC number. I have been ripped off a twice and PayPal was great about recovering my money both times.

I am not a cash person—any time I have cash it ends up being spent on cupcakes at work or in the vending machine...

[Amara]

Option 1 is to pay something between $10 and $250, which would mean interest on the difference between $250 and what I paid. Option 2 is to pay the statement balance of $250, which results in no interest charged. Option 3 is to pay everything at $350, which also results in no interest charged.

So when you talk about paying off the credit card each month, are you talking about option 2 or option 3?

Having paid off my credit card in full just after the first of the year (after I had balances for at least two years prior), I lean heavily toward option 3. I recognize option 2 as better as long as I have the money to pay the debt off when it is due but right now having a credit balance, having paid more than I owe, brings me immense relief.

Oddly, perhaps, I want to increase my credit balance, that is, I want to pay money onto the credit card even when I have no balance. Kind of pre-paying it as it were. It may not be the smartest financial thing, but there's something large to be said, at least for me, by not only having no debt but having a credit balance. I am doing the same thing with my phone and gas bills too, paying more than I owe each month to build up that credit balance. That way, if I ever have a time or two when I cannot pay or would have difficulty paying I have given myself the gift of no worry.

[WillyNilly]

^ I often prepay a bit on my apartment maintenance bill, and my cable bill, and my cell phone bill for the same reason (I especially like to do this a few months in advance of a big bill, like an upcoming tuition payment, a vacation or the holidays, so my regular monthly bills will be less that month).  But I've found with credit cards, they wont really let you do that.  At some point they will mail you a check for the overpayment and bring your account back down to zero. 

[KenveeB]

Having paid off my credit card in full just after the first of the year (after I had balances for at least two years prior), I lean heavily toward option 3. I recognize option 2 as better as long as I have the money to pay the debt off when it is due but right now having a credit balance, having paid more than I owe, brings me immense relief.

Oddly, perhaps, I want to increase my credit balance, that is, I want to pay money onto the credit card even when I have no balance. Kind of pre-paying it as it were. It may not be the smartest financial thing, but there's something large to be said, at least for me, by not only having no debt but having a credit balance. I am doing the same thing with my phone and gas bills too, paying more than I owe each month to build up that credit balance. That way, if I ever have a time or two when I cannot pay or would have difficulty paying I have given myself the gift of no worry.

My problem with Option 3 is that I can't budget that way. I can budget for my month easily. Budgeting for the month plus the little bit extra at the end and minus whatever I might've paid last month? Not so much.

[Amara]

But I've found with credit cards, they wont really let you do that.  At some point they will mail you a check for the overpayment and bring your account back down to zero.

I hope that doesn't happen with my credit union. I really like adding to the credit balance month after month. Ideally, I would like it to be about $1,000 but even one-tenth of that would be good.

When I went to make that first overpayment, what I did notice is that I could not overpay the balance with the BillPayer feature. It just would not let me do that. So I tried the Transfer feature--which allows me to transfer money between accounts--and that worked.

My problem with Option 3 is that I can't budget that way. I can budget for my month easily. Budgeting for the month plus the little bit extra at the end and minus whatever I might've paid last month? Not so much.

The way I do it is not to worry so much about adding or subtracting from the balance. I simply pay any amount due plus the extra I want to add. It's the same with the gas and phone bills. My last phone bill, because of a credit balance, was $36. I paid $100. My monthly bill for the phone and Internet is about $75 so I will have another credit balance of about $60. I will again pay $100 and so on until I build it up to several hundred dollars at which point I will pay the monthly bill in full and leave the rest alone.

I really am getting to like this. Not being in debt is such a *huge* gift to myself. I think it's the best gift of all.

[SoCalVal]

I prefer to use debit cards because the money goes away quickly.  I'd also prefer DH use debit cards over writing checks because he's terrible at keeping track of the checks that are still out.  For our wedding, for some bizarre reason, he insisted on writing a check to our priest, rather than give him cash (we paid our servers and hall manager's tip in cash).  As a result, the check cleared when there wasn't enough money in our checking account so our bank automatically transferred money from our savings, which costs us $6.  When DH told me what happened, I said, "I told you it would be better to pay in cash."

Now, I'm not fond of the "I told you so," but DH has a long history of not keeping track of outstanding items in our checking account so we get dinged $6 every time the bank auto-transfers from our savings.  Eventually, I will take it over again (sometime soon now that our wedding is over).  I used to keep track of our joint accounts then got really busy doing EVERYTHING ELSE so I felt this was one he should be able to handle successfully since his finances, his bill-paying habits and his credit rating are better than mine.  By the time this particular check cleared and, once again, we got dinged because DH couldn't be bothered to keep track of the outstanding items, all I really could say was what I said.  Not nice, I know, and I didn't say it in an angry tone (said it in a tired, resigned tone).  I also said he needed to cover the $6 we got dinged.  I figure it's a sign I need to start tracking our accounts again soon (I just don't understand how someone who's better than me, financially, at all the other things I listed just can't keep track of the outstanding items in our checking account).  I never write checks on our checking account, and I make sure with DH that we have the available funds before I pay for something using our account (unless I've just made a deposit so *I* know the money is there for sure).

Credit cards -- I'll be glad when mine are all paid off, and I can get rid of most of them.  I really don't need them but have been too fond of shopping over the years (and now) so those are the bane of my existence.  Fortunately, things aren't out of hand, and I regularly decline when vendors ask if I want one of their credit cards.

[Cat-Fu]

But I've found with credit cards, they wont really let you do that.  At some point they will mail you a check for the overpayment and bring your account back down to zero.

I hope that doesn't happen with my credit union. I really like adding to the credit balance month after month. Ideally, I would like it to be about $1,000 but even one-tenth of that would be good.

When I went to make that first overpayment, what I did notice is that I could not overpay the balance with the BillPayer feature. It just would not let me do that. So I tried the Transfer feature--which allows me to transfer money between accounts--and that worked.

TBH you're probably better off putting that money a savings account for emergencies. That way you will earn interest on the money, instead of giving various companies a free loan.