Using Credit Cards with MoneyWell

Credit cards and budgeting don't go together well unless you are very disciplined with your use of them. Most credits cards charge very high interest rates, which can cost you hundreds or thousands of dollars each year.

What's worse is the temptation to see your credit limit as an extensions of your available money. This can lead to growth in debt to the point that you can't easily pay it off. It's an insidious trap that sneaks up on you.

The right way to use credit cards is as a deferred cash account. This means that you treat the balance of your credit card as money spent out of your bank accounts and not as an extension of them. If you only spend the money you earn and pay off your credit cards before they charge you interest, you will be in great shape.

Why use credit cards at all?

If there is such a huge potential for debt, why would anyone use a credit card at all? There are some advantages:

• Reward points - You can earn free trips with airline miles or cash back.
• Purchase protection - Many cards extend warranties or allow charges to be disputed.
• Rentals - Renting cars or reserving hotel rooms is safer on credit cards.

Setting up credit cards in MoneyWell

If you don't keep a balance on your credit card, then it's not considered debt. You can then set it up as a cash flow account along with your bank accounts. If you do carry a balance, then you'll need to make sure to pay down your debt.

Using a Credit Card with a Zero Running Balance

Since the balance on your credit card is going to be paid off each month using your bank account, assign the negative amount to your primary income bucket where you assigned your primary bank account balance. This gives you the "real" income balance for spending so you don't double spend the income you have on your credit card.

Remember that your credit card is actually a deferred cash account in this scenario.

Every purchase made on your credit card should be assigned a bucket. Treat your transactions as if they came out of your income.

When you pay your credit card bill, don't assign a bucket. Since this is one of your cash flow accounts, you don't need to track this money. All you're doing is moving it between accounts. You can even set this payment up as a bank transfer so there MoneyWell automatically assigns the transactions as "bucket optional".

Using a Credit Card with Monthly Balance

If you are carrying a balance, then you should focus on paying down your credit card. Since you need to pay down your balance a little bit each month, then you should assign the debt to an expense bucket – named something like Credit Card Debt – so you can track your progress.

In this case you will need to add a few steps to keep your buckets in balance, but you should still assign every purchase to a bucket.

In this setup, spending and debt repayment are handled separately.

When you make a purchase on the credit card, record it as you would any other expense. Create the transaction on the credit card account and assign it to the appropriate bucket (for example, Groceries). This represents funded spending and doesn’t reduce your existing balance.

To track the balance and repayments you’re carrying, you’ll need two buckets:

• Debt Repayment – which holds money you’ve set aside to pay down the balance
• Credit Card Debt – which represents the outstanding balance you owe on the card

When you pay the credit card, the payment itself should be recorded as a normal transfer between your checking account and the credit card.

For example, suppose you’ve spent $100 on the card this month and you also want to pay down $100 of existing debt. You’ll make a $200 payment to the card.

Create a transfer from checking to the credit card for $200, then split the transaction like this:

1. a $100 withdrawal assigned to the Debt Repayment bucket
2. a $100 deposit assigned to the Credit Card Debt bucket
3. a $200 withdrawal with no bucket

The $100 for the new groceries spending was already assigned when the money was spent. The part that pays down existing debt is represented by moving money from the Debt Repayment bucket into the Credit Card Debt bucket.

Any interest incurred due to the balance on the card should be created as a transaction and assigned to the Credit Card Debt bucket.

Using this approach keeps account balances and bucket balances in sync, allows you to track new spending normally, and lets you pay down an existing credit-card balance over time.