Wednesday, January 23, 2013

Your Personal Line of Credit, Quick & Dirty Edition

Our financial system is increasingly stacked against the common person. In medieval times kings gave monopolies and patents to favored individuals as a reward for loyalty and service.  The monarch, of course, did not lighten his own purse by this token of generosity.  Rather, the commoners would foot the bill by paying higher prices on the artificially-restricted good.

The consumer credit industry works in much the same way.  People of above-average intelligence and self-control can reap all the benefits of easy credit while actually getting PAID to use it. The industry, of course, would not be doing any of this if it were not making a tidy profit. As always it's those of average and especially below-average capabilities who foot the bill by buying more than they can afford and then financing it at exorbitant rates. The industry surely has no love for people who can exploit its system (in industry jargon people who use credit cards responsibly and never pay financing charges are "dead-beats"!) but will tolerate them as they are such a small minority of consumers.

To see if you are the sort of person who can exploit this type of quick and dirty personal line of credit, answer the following:
  1. have you ever bought overpriced, ready-to-eat food at the grocery when you were absolutely starving?
  2. do you ever fill your cart with 1 or 2 impulse purchases from the check-out stand?
  3. do you ever pay less than your full credit card balance, such as around Christmas time?
  4. is dipping into savings to cover monthly expenses something that happens to you several times a year?
If you answered YES to any of the above questions except #1, then the following system is not for you. If you can truthfully say that 2-4 never applies to you, though, then you may have the financial iron-will for this system. If you have serious financial iron-will, of course, you may already be using your credit card (note singular- there should be no reason for using multiple cards unless you already have financial discipline issues) to pay almost all of your monthly expenses, including utilities, food and consumables, health care, etc.  Pretty much every credit card gives 1% cash-back, which amounts to several hundred dollars per year of free cash.  If I could pay my mortgage bills through credit cards I would!

Now, every month you are probably receiving "checks" in the mail from your credit card issuer.  Before the credit crunch of 2008, it was not uncommon to get offers for new cards with the option to balance transfer with no transaction fees!  This amounted to a 0% interest loan for 1 year.  Those days are gone, though, and now if you take advantage of those checks you will typically pay 4-5% on the balance immediately.  That is still pretty good compared to other types of loans, though, just make sure the term for the 0% introductory loan is at least 12 months.  I will probably be using this method to roll-over the large expenses we accrued during our new home purchase and paying off the balance in 2-3 years.  But if you have true financial iron will, here is how you can avoid paying any transaction overhead- wait for a new credit card offer with at least a 12 month 0% introductory rate, open it, and then use it to make all your subsequent normal monthly purchases.  If you had an instrument that is now going to a high interest rate, use the cash you would normally spend on monthly expenses to pay off that old debt.

Example:
  • Assume you have $6,000 in debt on a credit card that is going to a high interest rate soon and that you incur $2000/month of regular household expenses which you are able to pay through that card
  • Open up a new credit card with a 0% introductory rate for the first 12 months; do this 3 months before the rate on your existing credit card goes up
  • Each month, pay $2000 of normal expenses on the new card and use the cash you'd normally pay expenses with to pay off the debit on the old card; do this for 3 months
  • At the end of 3 months, the old card whose rate is about to be jacked up will have a $0 balance while the new card, with at least 9 months left at the introductory 0% rate, will have the old debt (actually, a bit less since you should still be whittling down what you owe with regular monthly payments)
In theory one could repeat this process several times to string along your debt for several years.  In practice, I would recommend not doing it more than 2-3 times to avoid the hassle of multiple cards, and also because your credit score will take a small hit from opening so many new accounts.  If you have financial iron-will your credit score should already be solidly excellent (730+) so this should not be a big deal, but I would still not do it right before taking out a big loan (auto, home).  Needless to say you should also not be doing this simply to balloon your debt, only to string along a large, necessary, and singular expense (house move, wedding, birth of a child, etc.) that you WILL pay down in a couple of years.  Again, all this depends on financial iron-will.  The system is not for everyone, so don't feel bad if you suspect it's not right for you- it was certainly not for Obama.

Or:



OR YOU CAN GET WITH THAT!

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