What is Credit Card Float?
Credit card float occurs when you're using this month's income to pay for last month's credit card bill. In other words, you're relying on future income to cover past expenses. While this might seem like a harmless way to manage cash flow, it can lead to a false sense of your true financial position.
If you are using the Envelope System of the FaithFi App, it is helpful to understand the credit card float and how to best manage it.
How Does Credit Card Float Happen?
When using a credit card, even if you pay your statement balance in full each month, a transaction is not paid for when purchased but when the statement is paid at a future date. This timing discrepancy between when a purchase was made and when it is actually paid for leads to the float.
The envelope system in the FaithFi app helps address this timing discrepancy by immediately recognizing money spent in an envelope and moving it to the credit card envelope. For instance, if you spend $100 on your credit card and you assign that transition to your Groceries envelope, the app will transfer $100 of funding from groceries to that respective credit card's envelope so that the money is available to pay your credit card.
How Do I Avoid Credit Card Float?
- Reconcile Your Credit Card Envelope: If you are using the Envelope System, the best way to avoid the float is to Reconcile your credit card envelopes. This feature will help ensure the money in your credit card envelope matches your credit card balance. To reconcile the credit card envelope:
- Click on the Credit Card Envelope
- Click Reconcile
- Follow prompts and Add Funding to align credit card balance with credit card envelope
- Maintain Your Checking Account Balance: To ensure you can always cover the float, your checking account balance must, at a minimum, must cover your current credit card balance(s) + upcoming expenses. For example, if you have $2,000 in credit card balances plus you have upcoming bills and expenses before your next paycheck of $1,500, you need to have at least $3,500 in your checking account.
How Do I Get Out of Credit Card Float?
If you find yourself in a situation where you are unable to reconcile your credit card envelope or move enough money in your checking account to cover your credit card balances + upcoming expenses, here are some options
- Transfer Money: Move money from a savings account into your checking account to cover the credit card balance(s) + upcoming expenses
- Transfer Funding: If you are using the envelope system and you reconcile your credit card envelope, it may lead to a negative available for funding. Go through your envelopes and adjust/reduce funding in other envelopes to bring your available for funding to $0
- Fund the Credit Card Envelope Over Time: If you have been successfully paying off your credit card each month but discover your credit card envelope is not covering the float, you may not need to take drastic actions, rather just begin funding the credit card envelope each month until the credit card envelope balance matches the credit card balance.
Final Thoughts
Credit Card float can be deceiving. Many people are living off the float and can pay their credit card statements in full each month, but there is a difference between paying the statement and paying off the full balance. A simple rule of thumb is to ensure you always have enough money in your checking to cover your full credit card balance(s) + upcoming expenses, which will help ensure, no matter what comes your way, you can pay the entire balance off at any time.