In which I assert that it's ok to carry a credit card balance — as long as you have a plan.
We're all personal finance people here. We know that you should never, ever carry a credit card balance. Unless you've got a 0% APR balance transfer thing going, you're supposed to pay off your credit card balance each month.
If you are someone carrying a balance, you'd better be in the act of rectifying some Very Painful Money Mistakes by aggressively paying down your credit card debt.
I, however, think that there are times when it's ok to carry a credit card balance — even if you aren't in the midst of a financial transformation.
I explain some of my reasoning in the latest episode of the Money Mastermind Show (the fun really gets going around the eight-minute mark):
Basically, my argument boils down to this: I'm willing to pay a “convenience fee” in the name of cash flow and not giving up my lifestyle during the summer.
My Summer Finances
Summer is an interesting time for my family's finances. My husband is an adjunct instructor at the local university, so he gets paid by the class. During the fall and spring semesters, he often teaches three or four classes. Summer is a different deal, though. Usually, he only teaches two classes, one of which is online and pays based on enrollment.
The result is that my husband's income, which we often use as the “gravy” in our lives, is significantly lower. At the same time, I usually cut back on my own workload because my son is home all day. And I like to do things like camp and hike.
Summer = budget crunch right at the time when there is a chance that expenses will be at least a little bit higher.
My family isn't one to start pinching pennies, just because it's summer, though. Sure, it's possible to have a frugal summer, and we don't go out of our way to spend money during this time of year, but we're really not into making unnecessary sacrifices.
Shocking, I know.
And this is where the whole carry a credit card balance thing comes in.
Carry a Credit Card Balance = Convenience
Yes, we have an emergency fund. And, yes, we have a bit of a cash cushion built up because I recognize that we have a variable income. But the cash cushion isn't enough to cover an entire summer's-worth of a smaller income. And it's really not worth it for me to go through the process of selling investments to raid the emergency fund (and paying the attendant fees).
And I have a firm, no-touchy policy on the small amount we keep in the high-yield savings account. That's for true, need-to-address-this-immediately-or-we-will-have-severe-problems emergencies. (My entire emergency fund philosophy can be heard on the Listen Money Matters podcast.)
Which brings me back to the credit cards.
During the summer, it is common for us to carry between $500 and $2,000 on credit cards. We carry a credit card balance on one of the two cards with 9.99% interest rates. Normally, this means we carry a balance for the month of July and the month of August. So, if I do a quick and dirty calculation, based on carrying the highest possible balance, we're looking at $16.65 per month or about $33.30 for the summer.
In reality, we probably pay right around $20 to $25 in interest on our carried summertime balance. Granted, that's still more than paying $6.95 two or three times to sell investments, but I don't have to go through the trouble. And the waiting.
Using the credit card easier. And some of the interest charges (but certainly not all) are offset by rewards. Yay rewards!
When my husband gets his first paycheck of the fall semester, we simply pay off the carried balance and move forward with Finances As Usual.
The nice thing about this carry a credit card balance during the summer thing is that it doesn't require us to change our habits. Of course, this does cost us; we do pay a “convenience fee” for being unwilling to cut back or work more.
But we still track everything we spend, and we keep things reasonable and under control. We still spend consciously, on the things that matter to us, and avoid spending on the stuff that doesn't matter.
As always, the key to savvy credit card spending, and not getting in too deep is paying attention, and not using the credit card as an excuse to go overboard. This is not something I recommend for someone struggling with debt. This is something that works for my family finances, and something that I do, eyes wide open, willing to accept the consequences.
What do you think? Am I justified? Or am I breaking an essential Financial Commandment?
As I mentioned on the show, I think in situations like yours where your family closely monitors spending and pays off the credit cards every month – having small balance on the credit cards over the summer likely isn’t going to be a problem.
The problem comes into play for so many families who aren’t paying close attention, who don’t carry an emergency fund, and who end up creating a big balance on their cards that they aren’t able to pay off right away, taking away options and creating an issue for their families. The lure of easy money.
Like with most things I don’t think there’s a one size fits all answer, it’s more of a “if it works for you – that’s great! If not, be wary of using those cards”.
Thanks for making me feel better 🙂 Yeah, I agree that it makes a difference if you are planning ahead without just swiping mindlessly. You have to pay attention if you’re going to use a credit card.
Hi Miranda,
The central idea for this post is in single word ‘Plan’.If one knows what he/she is doing,it is fine.As for me,I am not in favor of carrying balances forward.Actually i myself have felt the heat of carrying forwarded the balances on my credit card.
Though this amount of $ 6 or 7 is not much but if you take into consideration the years for which you continue this,it could be significant amount.
Anyways this post was such a pleasure to read and this was second for me from you after that of Emergency Fund.Wonderful post!!
I think you’re right that planning is very important. Carrying old balances for years at a time can constantly erode your finances! But if you have a plan to avoid that fate, you are likely to come out ok.
Great post and show. It’s all about mindful spending even while using a credit card. As long as you’re aware of what you’re doing and planning. It can definitely work. I’m a big believer in living and there is some costs associated with that and I totally enjoyed this post.
Thanks for dropping by, Jason! I agree that mindfulness is key. And check us out tonight (6/18)….We’ll be talking experiences vs. things.
I think what you do is your own business, but if you have a comfortable income during the rest of the year, I’m curious as to why you don’t put aside “summer money” in advance rather than after the fact. $33 isn’t a large amount of money but to me it adds up… Here’s just one example, although it is aimed at younger people. https://www.linkedin.com/today/post/article/20140527113349-330990956-if-i-were-22-get-a-financial-head-start
Honestly, we keep a bit of a cushion in our checking account most of the year. But, yeah, we’ve thought about “summer money.” And what-not. And we probably could. But it seems like another layer of planning. Plus, our “spending plan” is basically cover all the important things (retirement account, charity, bills, emergency fund, etc.) and spend the rest of it. We could add another tier of “summer money,” but we’re lazy. There really is no other reason. Beyond the fact that we’re lazy, and it would mean changing our habits a bit the rest of the year so that we would either have to work more to come up with the summer money payment, or we would have to cut back on something else during the month.
I’m actually carrying a balance at the moment because T was out of work over the past couple of months. Paying interest sucks but I felt more comfortable conserving our emergency cash in case of a real emergency.
You make a good point. In a temporary situation, it’s hard to drain those emergency assets, since you know you’ll have to replace them. When you know the circumstances will change for the better quite soon, it’s much easier to pay the interest and move forward.