How to incorporate credit into budget?

Submitted by BraveCheesecake6090 t3_zxayvm in personalfinance

Hi everyone!

I’ve posted here before and happy to update I now have a $3000 credit line — a decent start for a young working adult with few responsibilities and obligations.

Previously I had worked out a budget system using 2 checking accounts and associated cards and a savings account, where half of each paycheck would go into each checking account after $200 went into savings (matching the amount that goes into my 401k), one account for “static” bills like rent, grocery, medication, phone, internet, etc. and the other account for variable bulls like heat and electric, but also all other spending, new clothing, dinners out, etc. and whatever was left over in that account when I got a new paycheck would also go into savings (as a way to incentivize myself to actually use the money but also to help pad savings)

However now that I have a credit card I’m wondering what the best way to incorporate it into this system would be? Should I replace the second “fun” checking account with the credit account and use that half of my pay check to pay down my debt every month? With the remainder going into savings?

Im pretty decent about living within my means at the moment but also have a tendency to put off life-improving purchases if I feel like I’ve spent too much recently even if getting such purchases done upfront would be more beneficial in the long run.

0

Comments

You must log in or register to comment.

DeluxeXL t1_j1z8mhf wrote

Credit card is not an expense, unless you're paying interest. If you're using a credit card correctly, i.e. always paying each bill in full and on time, it is just a pass-through and doesn't even appear on your budget.

8

BraveCheesecake6090 OP t1_j1z8x32 wrote

I haven’t used the card for much yet but would like to build credit. I’d also like to pay things off in a fair amount of time so I can cover both smaller expenses but also larger expenses by freeing up credit easily

1

t-poke t1_j1z9f02 wrote

> I haven’t used the card for much yet but would like to build credit.

You can build credit with a credit card without paying interest.

> I’d also like to pay things off in a fair amount of time

If you're not paying the full statement balance each month, then just stop right now. Do not use credit cards to pay things off over time.

5

Loutro-Fift t1_j1z9f0m wrote

Set up your utilities and subscriptions to be paid by the card. Pay the card off monthly. Don’t use the card to buy things you can’t afford. Don’t maintain a balance on the card, this isn’t free money.

5

FerrociousButtn t1_j1z9nv4 wrote

I think what they were saying is that you should create your budget independent of your credit. E.g. your income of $x,xxx with $xxx going into savings, $xxx for expenses, etc. The only time your credit comes into play is using it to pay for those already budgeted expenses. I cannot stress enough that you should only put what you can pay off immediately on your credit card to avoid carrying a balance and creating debt. Even by putting small purchases on your card will build credit if you pay it off in full at the end of the cycle.

2

BraveCheesecake6090 OP t1_j1zcb1w wrote

Ok I think I understand, I thought the wisdom was to keep the balance to what you can pay by the end of the month. I’m not suggesting I increase my budget for x BECAUSE of credit but rather suggesting if it would be a wise choice to “replace” my usage of the “variable” debit card with the credit card so that by the end of the month I have a full pay check stashed away to use to pay off the credit card amount RATHER than the current system when I have half a paycheck every 2 weeks, with the first “2 weeks” having a fair portion going immediately to bills. Obviously there are ways to budget around this so it doesn’t feel like I have significantly more money in the second half of the month than I do in the first half but I wonder if it would be easier to think and plan around those expenses using a credit card — although perhaps just moving all my utilities into the card all together would be easier? And then just using the $200 or so saved on the “static” account to go towards the credit balance EOM ?

1

DeluxeXL t1_j1ze8mk wrote

Based on your comment, you still have the mindset of someone living paycheck to paycheck.

Once you have a one-month buffer in your checking account, when you get paid and when expenses are paid no longer matters.

2

BraveCheesecake6090 OP t1_j1zf4pv wrote

Hm i wonder if that’s a symptom of how I have my finances organized. I’m in the process of turning my 1 month buffer I currently have into a healthy 3-6 month emergency fund. It’s a little juvenile but it keeps all the bills paid on time, a consistent amount going into savings, kitchen stocked, etc. but does keep me perhaps overly wary of larger purchases like new (and needed) furniture.

1

DeluxeXL t1_j1zfrjc wrote

> I’m in the process of turning my 1 month buffer I currently have into a healthy 3-6 month emergency fund

They are not the same thing. You should put the emergency fund in a separate savings account. Your one-month buffer stays in the main checking account.

Open a 3rd account to save for short term needs, like furniture and sinking funds.

2

BraveCheesecake6090 OP t1_j1zgp7p wrote

Ah ok! This was something I had been thinking of doing once I hit 3 months in the emergency fund. (Holiday spending might have set me back a bit but I should be to that point by the end of February or so)

This is my first job out of college and I was basically broke once I took it after paying for associated moving expenses so savings has been a little slow.

1

DeluxeXL t1_j1z9kmr wrote

> I haven’t used the card for much yet but would like to build credit.

Only requirement to build credit is to pay obligations on time. You don't have to carry a balance to build.

> I’d also like to pay things off in a fair amount of time

21 days is a fair amount of time.

> so I can cover both smaller expenses but also larger expenses by freeing up credit easily

You have savings. Use it. It's very expensive to borrow with a credit card past the due date.

1

gbtx96 t1_j1za32t wrote

You can build credit without carrying a balance. Keep your credit utilization low (less than 30%, even better if you can do less than 10%) at the end of your billing period. You may want to make mid-month payments to achieve this.

Request a CLI at whatever interval the card issuer will allow you to (usually 6 or 12 months) - that will also help you keep your utilization low.

Spending money you don’t currently have in your checking account is a slippery slope and will likely end up hurting your credit in the end.

1

certifiedintelligent t1_j1zclwa wrote

Using the card more does not build more credit. Don’t fill up the card, do pay it off every month and your credit will slowly rise.

1

BraveCheesecake6090 OP t1_j1zd4ga wrote

Right! I just meant I want to make sure I’m keeping the card active every month rather than treating it as a “last option” and ending up with holes and dry spells in my credit history

1

FleetAdmiralFader t1_j1zgf8c wrote

From a credit risk perspective it is best to use <3% of your total credit line at any time. For you with only one card with a $3k limit this means $90. So if you consistently have a balance above that, let's say $200 you will get slightly dinged for "high utilization".

Your goal should be to always pay off the card fully each month and keep the card active. Active does not require a purchase every month but rather once a year or so, whatever prevents the card from being closed by the issuer.

You should put a Netflix subscription or something similar on the card and then use it however much or little as you want as long as you pay the balance each month.

2

certifiedintelligent t1_j1zjci4 wrote

Holes and dry spells aren’t a thing so long as the account is open. I have 14 credit cards (sign up bonus collecting), I use 1 on a regular basis, maybe 3 in a given month (depends on perks and types of purchases). The rest rarely if ever get used but consistently report “paid as agreed” to the credit agencies every month.

IF you can be responsible with it and pay it off every month, the credit card should be your first choice to pay for things because of the protection and perks (if any). For example, if someone skims your debit card and steals from your bank account, it’s a pain to fix that takes time. If someone skims your credit card and racks up false charges, you simply tell the card company you didn’t make those purchases and you don’t lose a cent.

1

michigoose8168 t1_j1z9max wrote

All your credit card is, is the reverse of a checking account. You’re allowed to spend first and put money into it later.

Your budget is still determined by your income. What you spend using the credit card needs to not exceed what you bring in each month. But things like grocery, internet, phone, heat, electric can probably be paid with your credit card.

Likely, you need to move from budget by account to a written budget so that you can track your credit spending.

2

Firm_Bit t1_j1zbnrg wrote

Forget the credit card when budgeting.

Use it for daily purchases that are already in your budget.

Pay it off in time.

The credit line is not extra money. It’s $0 additional dollars. It’s just a pass-through so that you don’t pay cash or need to use your debit card.

2

Liquidretro t1_j1zcdgb wrote

Short answer is, that it changes nothing on your actual budget.

Longer answer: I would recommend using a credit card like a debit card, so that for any purchase you make, you are setting aside money so that you will 100% make sure you have the ability to pay the bill in full for the spending you did last month.

Your wording scares me a bit that you might not be a good person to use credit cards responsibly, and that's ok. If that's the case just use the credit card to buy gas or a cheap subscription service, set the bill on auto pay and be done with it. This will build your credit just as fast as if you were to use the card for the majority of your monthly spending.

2

BraveCheesecake6090 OP t1_j1zcwxh wrote

I think I chose bad wording, rather I’m looking at how credit should impact the logistics of how the budget is paid/distributed, what things it makes sense to move from one checking account onto a credit card to be paid at the end of the month rather than immediately.

By “wanting to build credit” I just mean having consistent payments and balances month to month rather than say saving the card in case of emergencies or large purchases that would leave dry spells or holes in my credit history.

I do think your explanation though lines up with more of what I meant to say, if I should stop using the checking account for immediate purchases but rather defer them to the credit card and treat the checking account as the “credit card balance budget” that I use to pay off the balance every month

1

Liquidretro t1_j1zg5ao wrote

Your system sounds like it will work but I think it's more complicated than it needs to be. Something like YNAB would make this easier in my opinion and less accounts to deal with too.

1

certifiedintelligent t1_j1zceeu wrote

Your budget is income - expenses = savings. Credit doesn’t change that at all, it’s just another way to pay for something. The moment you start thinking credit is extra money in your pocket is the moment you start a painful and expensive lesson in debt and interest.

1

Triscuitmeniscus t1_j1zka6g wrote

If what you're doing now works, keep doing it. Pick a bill and auto-pay it with the credit card, and pay off the card every month.

There is a popular misconception that using your credit card heavily and paying it off every month will increase your credit score faster, but this is not the case. A $4/month Pandora subscription will work just as well. There is another misconception that carrying a small balance on the card month to month is good for your credit, but this is false as well. Pay it off in full every month.

1