Compartmentalization can mean a lot of things in a military context, from a useful tactic designed to help prevent emotions from interfering with the task at hand to a coping mechanism that allows service men and women to deal with the rigors of active duty. Interestingly, it also speaks to a strategy that can help military families save money and get out of debt.
Anyone in the military can tell you that clearly defined roles enable a group or an organization to operate with maximum efficiency and it’s no different when it comes to personal finance. In the credit card world, compartmentalization is often referred to as the Island Approach. The basic tenet of the Island Approach is that you should isolate different types of transactions (e.g. everyday purchases, business spending, financing a big-ticket purchase, or making a balance transfer) on separate cards, as if each is a desert island.
The benefits of adhering to this model are many, but perhaps the most obvious is the ability to obtain better overall terms. You’re simply not going to find a single credit card that offers the best rewards and the lowest interest rates, but you could certainly get one that offers the best possible rewards for your lifestyle as well as another with the longest 0% introductory term. Practically speaking, this could enable you to get a card like the Sapphire Preferred from Chase for its $500 initial rewards bonus, the likes of the Blue Cash Preferred from American Express in order to get 6% cash back on groceries and 3% on gas, and Chase’s Slate Card in order to get 0% for 15 months with no balance transfer fees. That credit card collection would certainly be a force to be reckoned with.
Improved Perspective On Spending
Still, a lot of folks might not even care, thinking that credit cards are good for nothing but racking up debt. And while they’d be right in the sense that irresponsible credit card use can be detrimental to one’s bank account and credit score, the theory of compartmentalization actually helps promote responsible use as well. When you’re using a single card and are adding new purchases to an existing balance every month, it can be difficult to keep tabs on how much you’re spending, which means overspending can easily go unnoticed. On the other hand, when you’re using one card for everyday spending and another to revolve a balance, finance charges on the former will immediately signal trouble. Living within your means by definition entails paying for everyday expenses in full on a monthly basis.
This approach can also help you get out of debt faster. Not only will you pay less in interest as a result of having a card specifically tailored to minimizing the cost of debt, but the new purchases you make won’t begin accruing interest immediately either. You see, credit card companies typically give you a grace period for paying your bill, which means interest won’t kick in until 20-30 days after it’s made available. That’s not the case when you revolve a balance, though, which means using the same card for carrying debt and making purchases will unnecessarily increase the balance to which your interest rate is applied. Using a two-card system also lets you control payment allocation, which will help you pay down your most expensive debt fastest. When you have multiple balances on one card, only the amount above the minimum is attributed to the balance with the highest interest rate.
At the end of the day, the benefits of using more than one credit card would seem to greatly outweigh the hassle. And isn’t it a military family’s M.O. to do what is right or most beneficial, even if it’s hard?
Odysseas Papadimitriou is the founder and CEO of Card Hub, a leading U.S. credit card and gift card portal, as well as Wallet Hub, the first personal finance social network. His expertise in the personal finance industry extends from marketplace development and marketing strategy, to credit risk management and underwriting. He contributes regularly to many leading publications, including The Washington Post, Forbes.com, TheStreet.com, The Huffington Post, Fox Business, and U.S. News & World Report. Odysseas holds an MBA from Duke University and a BS from Brown University.
This post was originally posted on 31 November 2013, and was updated on 7 December 2013 to reflect the current situation. Military Pay Military pay rates are set by Congress and the President in the National Defense Authorization Act (NDAA). The 2014 NDAA has been approved by the House of Representatives and the Senate Armed Services Committee. Senate [...]