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bleedingdrylawstudent
Posts: 12
Registered: ‎03-09-2009
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Paying expenses on credit card instead of using cash leads to lower interest charges?

I was reading a personal finance book which suggested that you not only make your usual monthly credit card payment, but that you take the money you set aside for your usual expenses (like gas, groceries, tolls, etc.) and use it as a payment for a credit card (as an addition to the minimum payment made). Then instead of using cash or your debit card for gas, etc. you would use the credit card to pay for things you usually pay with cash or your debit card. Though in essence you are still basically making only the minimum payment (and charging the extra cash paid for your expenses) you would be charged a lower interest rate since the daily balance would be lower.

Has anyone tried this or heard of this method? Is it effective?

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larinoriani
Posts: 182
Registered: ‎10-23-2010
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

[ Edited ]

Not sure if I understand that. Paying with a CC for all your cash purchases and then pay the minimum only? Are we talking on an account that it's supposed to have a revolving balance or PIF each month?

 

Im con-foo-sed :smileysurprised:


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beamMEup
Posts: 4,470
Registered: ‎12-31-2008
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

Well, I do a different flavor.

 

I use cards as checking accounts, sort of. 

For example, if I have a grocery budget of let's say, $100.

I track it and spend my budget or less.

And I pay the $100 onto the cc.

 

If I had a balance on a card, I would do (and have done) what you're suggesting.  Pay down the minimium or more on the balance; and run my expenses through the card.

 

The problem is being careful to stay on budget and not run up the balance.  Takes some discipline. 

I've used a checkbook register as a way to track what I've budgeted to spend on a card, to make sure I don't spend more and accidentally increase the balance that I'm carrying on the card.

One plus to this method is you can put the $100 grocery money on the card first, and then treat each charge as a withdrawal from the $100.

 

However, if there's any question about losing track of the new expenses, and accidentally running over the amount I had budgeted, I wouldn't even consider it.  I would sockdrawer the card and get it paid off.  Sometimes there's just too many gymnastics involved and you increase your risk of building a higher mountain of debt.

 

I understand what you're saying about the daily balance being lower.  We actually eliminated paying interest on an attorney's bill by running our expenses through the same card for the following two months.  By that time, we had paid the entire amount off.  That's the equivalent of 0% interest - not a bad deal.

 

You'll have to decide if the additional risk of using the card outweighs the potential benefit of lower average daily balances.

 

Best wishes to you!

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Ulan
Posts: 790
Registered: ‎09-09-2008
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

You mean that you take your whole salary for paying debt on your credit card and put your monthly expenses on the same credit card? That sounds like a reasonable approach, as long as you use the few dollars saved to get rid of that debt, which is the most important problem.

 

Of course, there is the not negligible risk that the credit card company cuts the limit to just above your debt in case they suddenly see some money from you. In that case, you would be completely out of money for day-to-day expenses.

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bleedingdrylawstudent
Posts: 12
Registered: ‎03-09-2009
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

You're not only paying the minimum. You get your paycheck, pay your bills including your credit cards. Then for example let's say you have $300 set aside for the week to pay for gas and groceries.  You would pay the $300 to a credit card (the $300 set aside for the week for gas etc.). Then you would pay for your gas and groceries with the credit card (since you used the $300 set aside for your weekly expenses as a payment to the credit card you're using now). The book says you'd have a lower daily balance so your interest charge would be less.

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Ulan
Posts: 790
Registered: ‎09-09-2008
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

[ Edited ]

 


bleedingdrylawstudent wrote:

You're not only paying the minimum. You get your paycheck, pay your bills including your credit cards. Then for example let's say you have $300 set aside for the week to pay for gas and groceries.  You would pay the $300 to a credit card (the $300 set aside for the week for gas etc.). Then you would pay for your gas and groceries with the credit card (since you used the $300 set aside for your weekly expenses as a payment to the credit card you're using now). The book says you'd have a lower daily balance so your interest charge would be less.


OK, so we talk about the same. As I said, the approach makes sense, if you are carrying a balance at the moment. Unless the credit card company starts to balance chase you, at which point you better have some kind of emergency fund.

 

Edit: OT: Do I get a cookie for the post number :smileyvery-happy:?

 

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cdtotten
Posts: 951
Registered: ‎05-27-2009
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

Remember that if you pay your statement balance in full each month, no matter how much activity went through the account, you will not pay interest charges. They only occur when you fail to remit full payment for the prior month. Average daily balance is only a factor when you fail to PIF each month.


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haulingthescoreup
Posts: 28,098
Registered: ‎04-01-2007
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

It doesn't save money to run everything through your CC's. It shouldn't cost money, either.

 

There's no interest charge for paying your bills separately with a check to the utility company, a check to Comcast, a check to the grocery store, etc etc.

 

And there's no interest charge for using plastic for all these things, IF you pay in full every month. So I'm not really sure where the lower interest bit comes from.

 

It sounds like that's what you were saying: you budget X amount of money for groceries and Y for gas and Z for the phone bill and on and on, but instead of paying them directly, you pay the CC that you charge them on. That certainly works, and there's no problem in paying your CCC's twice a month if that's how you've budgeted your money.

 

I just run everything through plastic for rewards, for convenience, and for record-keeping. I sure don't finance my ground turkey and shampoo. :smileywink:

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athensguy
Posts: 1,291
Registered: ‎02-26-2008
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?


bleedingdrylawstudent wrote:

I was reading a personal finance book which suggested that you not only make your usual monthly credit card payment, but that you take the money you set aside for your usual expenses (like gas, groceries, tolls, etc.) and use it as a payment for a credit card (as an addition to the minimum payment made). Then instead of using cash or your debit card for gas, etc. you would use the credit card to pay for things you usually pay with cash or your debit card. Though in essence you are still basically making only the minimum payment (and charging the extra cash paid for your expenses) you would be charged a lower interest rate since the daily balance would be lower.

Has anyone tried this or heard of this method? Is it effective?


If you pay earlier, your average balance will be a little lower assuming the same charges are made. You will have a slightly smaller finance charge.  This assumes that you are not paying the "New Balance" by the due date.  If you are, then the timing of your payment doesn't matter as long as you pay by the due date.

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Wolf3
Posts: 3,197
Registered: ‎01-24-2010
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Re: Paying expenses on credit card instead of using cash leads to lower interest charges?

 


bleedingdrylawstudent wrote:

You're not only paying the minimum. You get your paycheck, pay your bills including your credit cards. Then for example let's say you have $300 set aside for the week to pay for gas and groceries.  You would pay the $300 to a credit card (the $300 set aside for the week for gas etc.). Then you would pay for your gas and groceries with the credit card (since you used the $300 set aside for your weekly expenses as a payment to the credit card you're using now). The book says you'd have a lower daily balance so your interest charge would be less.


 

Yes, this does save you some interest, and and the longer the lead time between payments and charges the more you save.   If you start charging before you pay, it costs you more. 

 

Another approach is to have a separate card that you use for your monthly bills that you always PIF right before the due date. There would be no interest on this money and this frees up about 6 weeks worth of money to pay on the other account to reduce interest while you pay it down.


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