Sunday, February 18, 2007

Sunday - You say you want a credit card...

Discover Card recently sent me this offer (picture pulled from their website):

On its face, it seems like a great deal. 0% APR on purchases is like free money! 5% on Get More purchases and 1% Cashback on other purchases seems like making money off of spending money.

But delving deeper, one begins to see the devious nature of credit cards.

  • 0% APR on purchases is probably the best part of the deal. For probably the next 8 months, you only have to pay the minimum on your bill and not accrue and interest. This rate jumps to 12%, applied retroactively, if you don't have it paid off by the end of the deal.
  • 0% APR on balance transfers seem like a good deal on consolidating your credit. They'll even give you a year's time interest free. But like purchases, your rate will jump to 20-29% if you haven't paid it off, all applied retroactively. Also, they'll charge you an additional fee for the initial balance transfer of 3% of the transfer amount, up to $29. This COULD be worthwhile if you have over $1,000 on high-interest credit cards and want to move that debt around temporarily.
  • The 5% Get More deal is by far the most confusing. Every 3 months, Discover changes what type of stores you can get the 5% deal from. Sometimes its gas, or restaurants, or retail outlets. Who has the time to remember all that? Nobody. And that's what they count on.
  • The 1% Cashback is just as shady. If you read carefully, its says "UP to 1%". The first $1,500 you spend, you only earn 0.25%. The next $1,500 you spend, you only earn 0.50%. Only after spending more than $3,000 in a year do you get the full 1%. Contrast this to most Chase and Citi Bank Cards that offer you 1% immediately.
  • ex. You put about $500 / month on your credit card. This is $6,000 a year. None of your purchases every make the 5% Get More criteria because it's too confusing. You earn$3.75 ($1,500 x 0.25%) + $7.50 ($1,500 x 0.50%) + $30 ($3,000 x 1%) = $41.25.
  • ex2. In comparison, if you had 1% to begin with, you would earn back: ($6,000 x 1%) = $60.00. Or a $18.75 difference! That's two movie tickets and all you've done is selected a credit card correctly.


Stephanie said...

A lot of people manage to get a good deal out of this card by watching carefully to see what purchases will get them the 5% for the current quarter.

My problem would be that it's a Discover card, which simply isn't accepted as many places, even these days.

Finance Guy said...

Excellent point! I hadn't even thought about the acceptance factor. Yet another reason to not get this card.

Anonymous said...

You argue that credit cards are devious in nature, yet you have a scheme with them later on using the 0% APR to borrow money and earn interest on it before paying it back. Why did you change your viewpoint?

Finance Guy said...

Anonymous: Credit cards are not devious by nature, that particular Discover card ad was.

Leslie said...
This comment has been removed by the author.
Anonymous said...

But delving deeper, one begins to see the devious nature of credit cards."

-I quote your original post.

"Credit cards are not devious by nature, that particular Discover card ad was."

-Change of heart?

The first comment definitely implies all credit cards.

Finance Guy said...

Excellent point.

What I meant by that sentence is that credit cards can be devious, and the Discover card is one great example.

However, just because they can be devious, it doesn't mean any clever individual would not have the opportunity to game the system.

The balance transfer, interest collecting trick is a classic free income tool that is espoused by many personal finance bloggers.

But as I have cautioned in my posts, this game is reserved for people who know what they are doing, have excellent credit, and don't need that credit any time in the near future.