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?