Beating Broke

Personal Finance from the Broke Perspective

Using 0% Interest Rate Credit Cards

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The introductory and balance transfer 0% interest rates on some credit cards can be a very enticing benefit. The fact that we see it offered so often proves that it works as a marketing ploy for the credit card companies. Some people take advantage of the offers and do what they call “0% rate arbitrage”. They take the CC company up on their offer and then pull the money out as cash and dump it into a interest bearing account where they can make several percent on the money. It’s like free money. But are the offers worth using if you’re like me and just want to be debt free and live a financially responsible life?

The answer is not a straight yes or no answer. In fact, it isn’t really even a straight “maybe” answer. Much like most financial products, it is very dependent on your personal situation. Make no bones about it, I dislike credit cards. If I can, I will be credit card free some day and use only my debit cards. However, until that day happens, I’m stuck with them. I don’t use them, but merely pay them off. Until they are paid off, I’ve still got a few.

While I have no intention of ever trying the arbitrage that some people try, I have and will use the 0% offers to help with my debt repayment. It’s a free loan. Sure, the rate is temporary, and the rate on expiration is likely just as bad as the card I transferred from. But, for that introductory period, I pay no interest, and every penny that I send as a payment goes towards paying off that balance. Essentially, I’m making 8%, 9%, and in some cases 20+% on my money. The offers can be a great tool while you are repaying your debt.

Once you are done repaying your debt, however, credit cards have little to no use to you. The concept is that a credit card is a way for you to have a open line of credit whereby you can access your “credit” anytime you want from virtually anywhere. However, if you are a financially responsible person and maintain a debt free lifestyle, you’ll likely want to pay cash for nearly everything. Obviously, a debit card or good ol’ cold hard cash is your tool of choice.

One exception that could be argued for is reward cards. These are cards that give you rewards based on the amount of money you spend using your card. If you are responsible and pay off your balance within your grace period, you can make a pretty good argument for the use of a reward card for the sake of the rewards. And some of the rewards can be quite tempting. Airline miles, gas discounts, gift cards, and even cars are among the lists of rewards.

Some folks (like Ramit of I will teach you to be Rich) think that the reward cards are a horrible thing. The possibility of missing a payment or letting your spending get out of control is always there and one slip up can cost you well more than any reward you might get. And unnecessary risk is something you don’t want in your financial life.

Back to the 0% cards though. The bottom line is that if you are already using some self control and not using your cards, transferring the balance to a 0% offer can save you quite a bit of money over those few months that the rate is that low. If you can’t manage the cards you have, though, forget it. The risk of causing more harm to yourself is too great to add more accounts to your portfolio. Also, don’t let a great introductory/transfer rate buffalo you into signing up for what would otherwise be a horrible card. Do your due diligence and read the fine print for annual fees, grace period, other fees, and most importantly the normal rate. I’ve seen several of these offers that are great, until the offer is over and then you’re hit with a 29.99% rate. Obviously, the extra savings of the low rate wouldn’t outweigh the normal rate if you’re transferring a balance from a card that only had a 8.9% rate!

Be careful. Learn what you can and make as educated of a choice as you possibly can. I don’t condone using credit cards because I know first hand the damage they can do to a persons financial life, but I recognize that these offers can be a very valuable tool for the responsible few who have learned to handle their money properly.

Unused Credit Cards are Being Closed

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According to J.D. and several other places I’ve seen, Credit Card Companies are Being a lot more pro-active about closing unused Credit Card Accounts.  Why would they do that?  And why does it matter to you?

First, they do it because every open account costs them something.  It may not be much, but they still have to process the data and maybe even send out a statement.  Many have moved to not sending out statements on accounts that haven’t been used, but some still do.  Most importantly, any open account is an open credit line.  It’s a potential liability for the credit card company.  If you go from having no balance to maxing out a 5000 card, you’ve just added $5000 in liability to the company’s bottom line.  Not to mention that doing so is a likely red flag for impending financial trouble and that makes the liability a risky liability.  Any way you look at it, that isn’t good for the company.

Of course, if you continue to not use the card, it really doesn’t cost them much.  It’s just the potential that they are not willing to risk.  It’s a sign of increasing risk aversion on the part of the credit card companies.

So, why does all this matter to you?  Part of your credit score is based on your credit history.  The longer you have had an open account, the better it looks on your credit report.  It’s a sign of good credit management.  Another part of your credit score is the ratio of available credit to credit used.  So, if you have a $5000 credit line, and have only used $2500 of it, it looks better than if you had a $2500 credit line and had used $2000 of it.  If you have a credit card that you aren’t using, it’s adding to that unused portion of your available credit.  That’s good for your credit score.  But if the credit card gets closed, you don’t have that unused credit available anymore and your ration goes down.  And so does your credit score.

In both cases, the dip in your credit score is likely to be fairly small.  And it is likely not a huge problem.  But it is something you should be aware of if you had been planning on applying for any type of loan and have had a dormant credit card closed recently.  Also, if you are holding a card that you haven’t used recently and doesn’t have a balance, and want to keep it from closing, you can make a purchase with it once every couple of months to keep it active.  Just make sure to pay it off right away.

Beating Broke Rules: Credit Cards

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When it comes to Credit Cards, we have little patience.  The companies that administer the cards and their accounts will do just about anything to try and get your money.  Very few of them will do anything that isn’t in the interest of the company.

BB Rule: Debt Free means Credit Card Debt Free too!

Destroy as many credit cards as you can.  If you do use a credit card, keep the receipt and then send a payment for that amount immediately.  Our goal is to no longer use any credit cards and only use Debit Cards.  Debit cards will only allow you to spend what you have.  You’re not taking out a personal loan with each purchase as you are with a credit card and as a result, you are not creating more debt.

Credit card companieS! © by eliazar

The only way to use credit cards is to treat them exactly as you would a debit card.  Only charge what you can send as a payment.  Pay them off in whole each month, and stop worrying about the interest rates.  If used responsibly, and paid off in whole, credit cards can be a useful tool, and are necessary for plenty of online transactions.  It does require self-control, and the ability to stop yourself from using them for everything, and for things that you can’t afford to pay for.

If you can’t pay them off immediately, or can’t control yourself from using them above your means, stop using them altogether!