Remember playing kick the can growing up and how fun it was? You would hide and once your friend walked a couple steps in the other direction you would run as fast and quietly as possible to get to the can and kick it, then immediately run and hide again. Credit card kick the can is like that game. I mean it is not as fun and ideally you don't want to have to play the game, but sometimes you have to kick the can (interest) as far down the road as possible.
So here's how to play the credit card version of Kick the Can:
Let's say you spend $5,000/month. $1,500 of that is spent on your credit card, but then paid off each month from your checking account. Inflation increased and now you spend $5,500 each month. For the first few months you were able to afford this by dipping into some extra savings, but now you can't dip any more into savings.
So how long can you withstand this shortfall without incurring this credit card interest?
Each credit card company has a different period for when credit card interest kicks in, but typically it is around 21 days after the statement date. For example, your credit card statement date is from the 5th of the month to the 4th of next month. You then have 21 days after the 4th to pay off the credit card: putting you at the 25th of the month.
Credit card kick the can helps delay the interest down the road for a bit, hopefully for a few months.
This is only possible if you have multiple credit cards and it also depends on your spending, how often you are paid, and credit limits.
Credit Card 1: interest begins to accrue 21 days after the close of each cycle
Credit Card 2: interest begins to accrue 21 days after the close of each cycle
Credit Card 3: interest begins to accrue 25 days after the close of each cycle
Month 1:
You spend $2,000 on Credit Card 1. You can pay off $1,500 of it throughout the month, but lack the funds to pay off the $500 shortfall this month.
Month 2:
It carries over to the next month, but you use your income to pay off the $500 before the 21 days comes up which is before interest starts accruing.
You spend $2,000 using Credit Card 2. You can pay off $1,000 of it throughout the month, but lack the funds to pay off the other $1,000 because of having used some of your monthly funds to pay off $500 on Credit Card 1.
Month 3:
The $1,000 on Credit Card 2 carried over to this month, but you use your income to pay it off (before 21 days come up).
You spend $2,000 using Credit Card 3. You can payoff $500 of it throughout the month, but lack the funds to pay off the other $1,000 because of having used some of your monthly funds to pay off $1,000 on Credit Card 2.
Month 4:
The $1,500 on Credit Card 3 carried over to this month, but you use your income to pay it off.
You spend $2,000 using Credit Card 1. You don't have any funds to pay it off this month.
Month 5:
You pay off $1,500 on Credit Card 1.
You spend $2,000 using Credit Card 2.
You don't have enough funds to payoff the $500 so interest starts accruing after 21 days.
By playing the credit card version of 'kick the can' you were able to avoid interest for approximately 4 months and 21 days or around 141 days.
If your credit cards have rewards, then you were able to get up to around $80 or more in cash back.
At this point, or rather before this point, it's important to start planning and adjusting your finances to avoid interest in the 5th month by either finding a way to lower your budget or increase your income, both, or an alternative solution (savings, debt, etc.).
Sometimes this strategy can become confusing and hard to manage. It's helpful to use a spreadsheet and break it down by the following:
Credit Card Name
Statement Date
# of Days Until Interest Accrues
Current Balance
Statement Balance - this is the amount you need to pay off before the # of Days Until Interest Accrues.
Then you can put in your calendar the dates to have the statement balance paid off for each credit card.
See the article: Cash Flow Shortfall: What Do You Do? to learn how you can use financing ways to pay less interest when money is tight.
Blake Jones, CFP®, EA
(385) 398-4015
Blake@PomegranateFinancial.com
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