Credit cards offer a convenient way to manage your finances and, in many cases, enjoy rewards and perks. At the same time, however, their high interest rates pose a significant threat to your financial security, and credit card float could be the first sign of danger.
Here’s what you need to know about the term credit card float, including how it works, and how to avoid letting it negatively impact your money situation.
What is credit card float?
The term credit card float refers to the act of paying last month’s expenses with this month’s income.
allow their users to make purchases and pay for them at a later date. Each month, you’ll receive a bill for your transactions for the billing period, after which you’ll typically get a grace period of 21 days or more before your payment is due.
Generally speaking, you can on your purchases if you fully pay your statement balance by your due date. But even if you pay your balance in full each month, you may still be floating your expenses.
How to know if you’re floating your credit cards
Credit card float involves borrowing against future income rather than what you have available right now. As a result, you can easily tell if you’re stuck in a float cycle by comparing your credit card balances and your checking account balance.
If you can’t afford to pay off your credit cards today, you may be riding the float because you don’t have the cash on hand to cover your debt.
That said, not everyone keeps enough cash in their bank account to cover their credit card balances. The important thing is that your expenses from the current month, including credit card charges, don’t exceed the same month’s income.
In other words, you can give yourself a pass if you can pay off all of your monthly purchases at the end of each calendar month instead of relying on statement dates and due dates—though it’s still preferable to always have enough cash on hand to pay your bills.
Why the credit card float can be risky
If you don’t have enough cash on hand at the end of the calendar month to pay for that month’s credit card charges, you could be putting your financial well-being at risk, even if you ultimately pay your bill in full by your due date.
If you’re consistently using this month’s income to pay for last month’s expenses, you’re effectively turning your credit card usage from a convenience into a necessity. If you experience a financial emergency and don’t have sufficient , the increased spending could make it more difficult for you to pay off your credit card bill in full.
If you carry a portion of your balance into the new month, you’ll pay interest not only on that amount but also on new purchases—your interest-free grace period won’t be restored until you zero out the balance again.
Additionally, racking up a large balance each month can negatively impact your credit score. Your credit utilization rate, or the percentage of available credit you’re using at a given time, is an influential factor in your credit score.
Of course, a rainy day can create the same issue if you’re not floating your expenses from one month to the next, but you’ll have more financial flexibility if you’re not already playing catchup with your spending.
How to end the credit card float
If you find that you’re using this month’s income to pay for last month’s expenses, here are some steps you can take to remove yourself from a credit card float cycle:
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Recognize the float for what it is: Even if you’re paying off your balance in full by your due date, you’re in debt. While you may not be paying interest right now, it’s a ticking time bomb with potentially severe ramifications.
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Reduce your discretionary spending: Take a look at your spending over the past few months to get a full picture of where your money is going. Then, identify areas where you can cut back and start working toward your goal of paying off current expenses with current income.
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Cut back on credit card usage: You may be hesitant to do this, especially if you’re earning rewards on your spending. But minimizing your credit card usage until you’re out of the float can put you in a healthier overall financial position. You could even look into debit cards that offer rewards on your everyday spending.
Avoiding the credit card float
If you’re currently paying off your credit card purchases with the same month’s income, you’re already in a good position. But if you want to avoid the potential dangers of the credit card float, here are some steps you can take:
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Get on a budget: If you don’t already have a budget, you can create one by taking your income and expenses over the last few months to get a full picture of your spending habits. You can then create monthly spending goals based on how much you earn and track your monthly expenses to avoid overspending.
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Save for emergencies: As you develop your budget, create space for emergency savings to minimize the risk of going into debt for unexpected expenses. It can even help to set up automatic transfers to your to avoid getting complacent.
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Watch for warning signs: Regularly check your credit card and bank account balances throughout the month to evaluate your ability to pay for your purchases. You can also use a budgeting app to evaluate overall spending trends that may be harder to see from month to month.
Managing your money isn’t always easy, but taking these and other steps to keep your spending in check can help you take advantage of all the benefits credit cards provide without risking your financial health.
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