Wednesday, July 9, 2008

Be wary of credit card deals

Recently, I've been keeping a keen eye out for balance transfer deals that charge little to no fees for transfers. However, more often than not, I am seeing deals that offer very low APRs (0.99%) with 3% transaction fees.

While 3% transaction fees are normal, most credit card companies cap this fee to a certain amount. The cap can range from $50-$200. Make sure to read the fine print on each of these offers. Those transactions fees can mean the difference between making some easy interest money off of borrowed money or losing all that interest in the transaction fee.

Consider for example a $5,000 transfer. At 3%, the fee should be $150. With a cap of $50, the real transaction fee is 1%, while with a cap of $200, the real fee is still 3%.

Also, be careful of using balance transfer offers from credit cards you actively use. I made this mistake a while back. I charged about $50 to a credit card before I did a transfer of $8,500. Unfortunately for me, since I now carry a balance month to month, that $50 is accruing interest at 10% while the balance transfer has a 0% interest rate for the promotion period.

Obviously, dollar-wise, its not a lot, but the principle of the matter is very annoying.


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Anonymous said...

Why do you need to transfer balances? And why do you carry a balance?

Isn't it better to pay off your debt each month?

I've gotten a lot of 0%, and $0 transfer fee offers - yes, even lately with the "credit crisis". It's probably because my credit is excellent and I would never use them.

Finance Guy said...

The first thing to note is that I do have excellent credit. However, excellent credit is useless if you don't actually take advantage of it.

Debt is not always a bad thing. In my case, I decided I wanted to borrow a lot of money cheaply at once, and pay it back monthly. When the money is given to me at 0% interest, why would I care rather I was paying debt off each month, or over a 12-month period?

It's a classic risk/reward question involving the time value of money. Everyone values $1000 today more than a $1000 in one year. The interest rate given by the Fed or banks is the implicit rise in value (sometimes considered inflation) of money over time.

The simple value answer is that I get better value from $1000 today than next year.

Obviously, if you don't plan to spend on anything, you don't need debt at all.

Anonymous said...

I do plan on spending money on things, and I do. I plan on buying a house, and using the credit for that. I don't plan on financing a car (ever), or a sofa, or big screen TV. I'd rather earn the money and pay with my own cash (or use a credit card that doesn't carry a monthly balance.)

I can work for a week and get $1000 or I can borrow $1000 and pay it off over time with 0% interest. Yes, financially it makes more sense to do the latter because that money earns higher interest in my bank account, but emotionally it is more satisfying and better for me to use my own money and not borrow.

If there is something I want and I decide it is worth more than the money I have on hand I will pay for it. I guess it might be the "stupid" financial thing to do, but honestly it just seems like a bad idea to borrow a bunch of money for the sake of borrowing a bunch of money and possibly scamming interest off it.

You said you value $1000 today more than $1000 in a month, but you don't have either now. You owe $1000 today so don't actually have the money, (it's not yours just as the library book you get isn't yours), and will have broken even in a month/year if you pay if off - thus you don't even have $1000 then, you have $0, or a pitence in interest - it cancels out your debt.