Untangling Credit Cards In YNAB

How credit cards work in YNAB and what you need to know to get it right the first time!

True Confessions: I never use credit cards.

I have no problem with credit cards. I used to use them exclusively—airplane miles!—and then pay one big bill at the end of the month, but when I got married my husband was scared of them, (or me with them, I’m not entirely sure). For better or worse, we’ve used debit and only debit for years. And of late, I’ve dragged my feet because it just feels like one more thing and I am full up.

I asked Todd Curtis, our Chief Customer Officer, to break it down for me. Here is the fundamentals on how credit cards work in YNAB and what you need to know to get it right the first time:

Credit is a Fancy Word For Debt

The instant you purchase anything with your credit card, you are carrying debt. Even if you pay your card in full at the end of every month, and have cash on hand to back up your purchase, you still—for the time being at least—have debt. You borrowed money and you haven’t paid it back yet.

But you have a budget. Your dollars have jobs and all that good stuff. So when you are using credit cards in YNAB, and you make a purchase you need to move that money to your Credit Card Payment category.

Pro Tip: When you add your credit card account, make sure you choose Credit Card as the type. A category for payments will be created automatically.

You Still Have The Money (Sort Of)

When you use a credit card within your budget, that purchase “used” money you had budgeted for that purpose. When you spend $100 on Groceries on your credit card, that $100 will move from your Groceries category to your Credit Card Payment category.

You gave those dollars a job—Groceries. But you now owe them to the credit card company, so their purpose shifted, and now they will wait patiently to do their new job (pay your credit card bill!).

When your credit card bill comes due, all the money is budgeted.

Pro Tip: When you add a credit card, and the payment category is created, budget for the starting balance on your card. If you can’t budget for the entire balance, set a goal for what you cannot pay off right away. Then, when you make your first payment, make sure you have that same amount available in your payment category.

Tracking Your Payments

Here’s the real win: Your payment? It’s the amount available in your Credit Card Payments category. That’s it. Money is added to that category either through budgeted spending or because you budget it directly there to pay down a credit card balance you already had.

You can see all about it, including what part of the available amount came from last month, from card activity this month, and from budgeting directly to the category this month. You’ll also see a graph depicting the effect of paying your full available amount.

If you’re a paid-in-full user with no overspending in your budget, this will also match the balance on your card. So easy, right?

Pro Tip: If you think of yourself as a pay-in-full-every-month type of person, and those two numbers don’t match, you are probably riding the credit card float.

Overspending Is Different When Debt Is Involved

When you overspend from a cash-based account like a checking account, money has left your budget and your accounts. In essence, you’ve taken money from one of your other categories and spent it.

When you overspend on a credit card, the money hasn’t actually left your checking account yet. Instead, with overspending on a card, the consequence is that there’s no money to move to the payment. You have debt that you don’t have a plan to pay off (yet).

The way to fix this is simply to do exactly what you and YNAB normally do: Roll With The Punches. Cover your overspending by reprioritizing and moving some money around.

If you don’t use Rule Three, and cover the overspending, after the month rolls over, that overspending will be represented in the balance of your account. Budget money to your credit card payments category to pay it off.

Pro Tip: Positive balances on credit cards are treated like cash. You can budget them, just like money in your checking account. Positive inflows to cards just reduce your debt. So if you get one, you may notice that you suddenly have more money in your payment category than you actually need to pay. But that’s okay, you can move that money just like you do any other money in your budget.