How should I handle credit cards in Profit First?

Credit cards make paying for things pretty darn convenient. Sometimes a little too convenient. It’s important to manage your spending habits and remember that we are all in this FOR THE PROFIT. That’s right. Profit comes first, not last.

One of the core principles of Profit Fist is that debt is bad. Credit card debt is the most common form of debt businesses have. So are we suggesting you burn your credit cards? Heavens no. It just means that we have to be deliberate about how they are used.  Credit cards can significantly help improve cash flow, earn reward points, and help reduce bank fees.

The key to using credit cards with our Profit First Cash Management System (PFCMS) is to pay off the full statement balance each month, and NOT carry a balance. The moment you cannot pay off the statement balance you just converted that credit card to debt. And remember, debt is bad!  

Once you have an unpaid balance on your cards, you should implement a plan to pay it off. We recommend creating a special allocation to do that. That means one or more of your allocation percentages will need to be adjusted.

I know this seems harsh but this is the only way to take full control of your finances.  If you can’t pay off your credit card balance in full EVERY time it means that you are allowing the available credit on the card to decide what you can afford to spend, rather than the amount of cash available.  Credit Cards should only be used to pay for items that are planned and when you know that you have the funds available in your OPEX or M&S accounts to pay off those charges.  

Discretionary or non-discretionary, that is the question… Never use your credit card to purchase something you don't need, or can’t afford!  Not only is the interest on the card among the highest you’ll pay on any debt, but you will de-program your brain into believing that the Profit First system isn’t working! 

The downside of using a credit card, even when it is paid in full every month, is that your OPEX account balance shows funds in it that have already been spent.  If you make decisions on what you can spend based on the bank balance then you will always think that you have more cash available than you actually have (as the credit card balance is already “spent” - it just hasn’t shown up in your OPEX account yet).

There are two ways to handle your credit cards and maintain a proper view of your available funds:

1. Each time you do a PFCMS allocation, look at your credit card balance online and make a payment for the current balance.  This approach means that you don’t get the full number of interest-free days to pay, but is easiest to manage.
2. OR, each time you do a PFCMS allocation look at your credit card activity online and make a transfer to your spending account for the charges.  Now you can set up your card(s) to have the statement paid automatically from your spending account.

Remember, your credit cards are a tool that MUST be managed, and that an unpaid Credit Card balance is DEBT.  Debt is prison.  Don’t go to jail! You look terrible in prison garb… 

Call us if you need help managing your debt…