Do You Have Hidden Credit Card Debt?

Credit card debt is often referred to as the worst type of debt, and I agree. However, we normally think of credit card debt as the debt that accrues from months of making only the minimum payment, and the high interest that follows. While that’s definitely credit card debt, there’s also a less obvious form of debt that easily results from using credit cards. While I have always paid my full credit card balances each month (in my ten years of using credit cards), I only recently discovered that I have still been carrying credit card debt the whole time.

Typical Credit Card Advice

You may have read, or heard, “Make sure you pay your full credit card balance every month to avoid interest!” or “Credit cards are fine to use as long as you pay them off each month.” These are very true statements. Your credit card company will start charging you interest on any amount that you leave on your card for longer than a month. Credit cards charge very high annual interest rates such as 20%. Compare this to other interest rates: today, home interest rates are around 3% and car interest rates are around 4-5% (of course, the exact interest rate depends on your credit score). This is crazy! It’s easy to see why people can pay hundreds or thousands in credit card interest per year.

If you make the minimum credit card payment, you’ll avoid late fees, credit score impacts, and interest rate increases. However, you will still be charged interest on that remaining amount. In order to avoid paying interest, you must pay the FULL amount you put on your credit card each month by the due date your credit card company specifies.

How YNAB Uncovered my Credit Card Debt

I have always paid my full credit card statement balance on the due date. Because I was following the “rules”, I assumed I didn’t have credit card debt. Until I started using “You Need A Budget” (YNAB) software.

YNAB uses a zero-based budgeting method. A zero-based budget is one in which your income minus expenses is zero each month. This also means you plan and budget your savings and investments. YNAB imports your income, and then you allocate that income to your different monthly spending categories. With a zero-based budgeting method, you’re theoretically only allowed to spend money after you earn it.

I quickly ran into a problem while using the YNAB software. My income for the first half of the month would be imported on the first day of each month, and I (in theory) should have been able to allocate that to that month’s housing, transportation, and food expenses. However, it quickly became evident that I had to allocate some of that money towards paying off credit card balances—which were actually expenses I had accumulated in the previous month.

But allocating today’s dollars to past expenses violates the principles of zero-based budgeting. What was going on?

What “Paying Your Full Statement Balance” Really Means

This inconsistency made me curious. I started thinking about what it really means to pay your full credit card balance on the due date. Using this month’s paycheck to pay for last month’s expenses would have to mean that I’m carrying debt. But how could this be? I never carry credit card debt. I always pay off my entire balance on the due date.

I looked at my credit card statement dates. Here’s an example:

Statement cycle: Jan 8 – Feb 7

Due date: March 4

Because credit card companies give you a month to pay your statement balance, this means I was using March’s paycheck to pay for expenses from January and February. No wonder I couldn’t allocate March’s paycheck to March expenses—I had to catch up on January and February’s expenses first. If you always wait until the payment due date to make your payment, you will always be in this situation.

I had been carrying credit card debt for the entire ten years I had been using credit cards, without realizing it.

Why Paying Your Credit Card Balances On the Due Date Still Results in Debt

You still may not be convinced that waiting until the due date means you’re carrying credit card debt. Why does it matter, if it’s always getting paid before it starts accruing any interest?

Let’s consider this situation. It’s Feb 27, and you suddenly get fired from your job. You tell yourself you’re going to cut your spending ruthlessly until you find a new job.

But wait, you have a credit card payment due date of March 4 coming up for $1200. Remember, you still must pay for your expenses in January and February. But this time, you don’t have a paycheck coming in on March 1st. How will you pay for it? If you don’t have an emergency fund, you’ll likely make the minimum payment and have to start paying interest on your credit card debt.

This situation is the one in which debt becomes painfully obvious. Debt may not be a huge deal in your daily life, until you don’t have the income to pay for it anymore.

How to Avoid Carrying Any Credit Card Debt

The only way to avoid carrying credit card debt is to pay off your monthly expenses at the end of the month. Yes, this means making a credit card payment even though it’s not technically due for another month!

The only way I could get on a proper schedule for YNAB and zero-based budgeting was to pay off my existing credit card “debt” and start over. This hurt during that first month, because I had to pay off my existing credit card debt from previous months AND pay off the current month at the end of the month. This resulted in two credit card payments in one month. On the bright side, at least I realized this and corrected my course BEFORE a experiencing a situation like a job loss.

Now, I can truly budget and allocate my money from each paycheck, without having to worry about paying for previous accumulated credit card expenses.

However, I haven’t discovered a great way to automate this process. Previously, I just set up automatic credit card payments, which are set to pay the full balance on each due date. However, I haven’t been able to set up automatic payments to pay off the existing balance on the last day of the month. I’ve had to set a reminder to manually pay off each card at the end of the month. This isn’t ideal, but to me it’s still preferable to carrying credit card debt.

Do you think it’s necessary to pay your credit card balance before the statement due date? Have you found a better method to automate paying off your credit card in full each month?  Let me know in the comments below!

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