Since I rarely talk about finances, I’ve decided to write a piece on taking advantage of the credit card float.
Naysayers will say playing the game is a bad idea. It’s great only if you know what you’re doing.
There’s a few conditions in order to satisfy in order to safely take advantage of the float your Credit Card may give you. Now remember, I am writing this piece in context of Canadian and possibly American Credit Card Issuers. Other places, you may want to check what your grace period length is.
- You have the cash on hand to buy what you want. If you don’t have the cash to pay for it, don’t even bother.
- You know when your Credit Card statement cycles out
- You have a bank account that allows unlimited transfers between savings and chequing accounts. You also should have a chequing account that offers unlimited transactions
- You are not doing cash advances
- You are relatively regimental about your finances
Having a cash back credit card is optional, but strongly recommended if you want to take full advantage of what your creditor can offer.
So let’s begin on explaining how the credit card float works. I’ll provide a diagram below to illustrate on how this all fits together:
You go and purchase goods and services with your credit card, Merchant authorizes and captures the transaction later. A few days later the charge shows up on your credit card statement. During the time that the merchant actually captures the transaction, this can take up to 2-3 days for the settlement occurs.
When the merchant successfully captures the transaction, the charge will then finally appear on the statement. The day when the merchant successfully captures the transaction is also known as the posting date. Some credit card issuers calculate interest on the day where the transaction occurred, not the day when it was posted to your account.
Now here’s the key thing here you must understand on how the credit card float works, since the FCAC mandates that Credit Card companies should give the borrower a minimum grace period of 21 days from the date that the statement cycles out, the total amount of days you have to re-pay your creditor can range from either 51 days to a meager 22 days. During this period, you put the cash you have on hand in a High Interest Savings account and hold it there until the payment due date. It is recommended that you pay your bill 2-3 days before it’s due, however since we are doing it “safely”, I would recommend paying the bill 7 days before the due date.
To really make this work out, you’ll need to figure out on how to “automate” the transfer from the Savings to Chequing accounts and making the payment. For that, I would recommend using the scheduled transfers and scheduled bill payments feature that your Financial Intuition offers. If you time things well enough in advance, you’ll be taking advantage of your credit card float.
So what benefits can you reap by using your credit card in this manner? Here are a few things you’ve already taken advantage of:
- If you’re using a High Interest Savings Account that has interest calculated daily, you earn the amount of interest you’ve held in the bank for the amount of days where your money is held until you or the scheduled bill payment system makes the payment. Additionally if you have a credit card that gives out cash back rewards, you’ve taken more advantage of the credit card float.
- Since we’re paying our bills in full for last month’s balance, we incur no finance charges from the credit card company. This also applies to new purchases that have not appeared in the previous month’s statement. In other words, your new purchases have the new 51 to 22 days of an interest free loan given if you pay last month’s balance in full.
So remember kids, if you know how to use the credit card float to your advantage, you’re making some money back on the amount you’ve spent earlier. But then again, if you rely on the float because you simply don’t have the funds to make ends meet, you really need to have a second look on how your finances are done before you fall into the debt cycle.