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Author: thehendrys Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308230  
Subject: 3.9% until paid off deal. ??? Date: 1/6/2000 2:05 PM
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I was offered a 3.9% until paid off deal by Citibank. They told me they could send me X amount of dollars (like a loan) and I would only be charged 3.9% until the balance is paid off.

I know that Fools keep saying "Pay off your debt before investing", and so that is why I am making this post.

I have some money in savings and a little bit in stocks, and I thought that it might be a good deal to use this offer to invest more in stocks. If stocks pay an average of 10% per year, and I pay 3.9% to this balance, then I'm still making money in the end, right?

Any opinions on this???

Thanks for any useful advice on this matter.
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Author: Mei2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23382 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 3:42 PM
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1. Make sure you read the fine print on Citibank's offer (are there any [transfer] fees, for example?).

2. "Pay off CC debt before investing" means precisely that--generally, it will make more sense to pay off your credit card debts BEFORE investing. Thus, it would be better for you to maximize the benefit of the 3.9% rate by paying off your CC debt sooner rather than using the "extra" cash to put towards stocks.

3. I don't know how much your CC balances are, and I can understand one's eagerness in joining the market. But be patient; the market will be there. Good companies will still be there when you make your final CC payment (& we'll do a Happy Dance for ya). I "rushed" to buy QQQ (Nasdaq 100) in late December, thinking I just couldn't wait by the sidelines while Nasdaq kept rising. I bought at 180, and now it's at 166. (I'm in it for the long haul, though.)

Good luck.



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Author: lamarama One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23388 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 4:11 PM
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In theory that sounds great....

but in the real world, you have to pay back your debts... the stock market doesnt have to give you 10%. It doesn't have to preserve your capital at all. Just like Mei2 says, you could be hit with a short-term loss for a year or more, and then you won't feel too good about that great interest rate.

I suppose, however, that if you only borrowed for a portion of your investments, it would be about the same as using a margin account, but I would recommend imposing stricter limits on it than your broker would impose. Buying on 50% margin is asking for trouble. You shouldn't look at it any different if you're loaning yourself the money. 25% or less is a more acceptable amount.

And never never never make a late payment, or you can say adios to that great rate.

lamarama

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Author: lamarama One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23391 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 4:21 PM
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Rereading Mei2's post, I feel I should add something to mine.

You do not say if you are already in a lot of debt. If you are already in a lot of debt, do not do this. The whole idea would be absurd if you are already trying to pay off debt. Use that great rate toward existing debt instead.

I was writing assuming that you have no debt, because you didn't mention it.

lamarama

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Author: thehendrys Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23392 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 4:28 PM
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Thanks for the good advice Mai and lamarama.

We really don't have any debt on our credit cards, and we have been steadily sending about $200 per month to our online investing account. I just thought it may work out good for us to send about $3000 to our investment account so it could start "growing" - hopefully. Then we could send our $200 or more a month to pay off the credit card.

It was a good point you made about there not being any guarantees of 10% returns from the stocks. However, the stocks that we do own (T, KO, Q) are for the long term. The money that we have invested is not our "emergency" money - we have a separate savings of about $2000 for that.

Does any of this information affect your opinions? (As you can tell - I'm leaning toward giving this strategy a shot - but I'm still forcing myself to get the Foolish backing on the matter!)

Thanks a lot!!!


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Author: Mei2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23394 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 4:43 PM
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Hi Hendrys,

Oh, I see what you're proposing now. I kinda misunderstood your original posting.

My answer remains the same--don't take the offer. Lamarama makes good points: there are no guarantees, even if you're holding for the long term.

Plus, your monthly contributions will build up quickly! Why go out and incur debt just to make a "splash" when you guys are already on your way to making big waves without debt?

Good luck! Let us know what you decide.

Mei2



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Author: eWineguy One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23398 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 5:03 PM
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I have some money in savings and a little bit in stocks, and I thought that it might be a good deal to use this offer to invest more in stocks. If stocks pay an average of 10% per year, and I pay 3.9% to this balance, then I'm still making money in the end, right?

What happens if your investments lose value, rather than generating a positive return? The 10% average return you refer to is a long-term average, and your mileage may differ significantly. It's not a good idea to borrow money to invest - particularly not from a credit card. It puts you on the wrong end of leverage, and will diminish your returns at best, or compound your losses at worst.

If you wish to increase your investments, the most Foolish strategy would be to live a more frugal lifestyle and invest the money you save on living expenses. This might not be as daring or clever a strategy, but it puts you at much less risk of accumulating a punishing load of debt.

Fool On!

eWineGuy



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Author: thehendrys Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23400 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/6/2000 5:04 PM
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OK - I got enough good input. No matter how hard I tried I could not get a Fool to back me on this strategy, so I'm staying away from it!

Thanks for the help and advice Mai2.


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Author: bfontes Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23432 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/7/2000 12:04 AM
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I'm afraid you may have posted this question in the wrong board, since a lot of people here are religiously against credit cards or have a psychotic fear of them.

I say that going ahead with your plan is only moderately risky as long as you are financially secure enough to cover your butt. Long term stock market returns are over 10% historically and if you're afraid to use that figure for long term plans, then you might as well throw all the advice on this entire web site into the trash. By being financially secure I mean you have to be able to make sure you never break any of the C.C. rules and allow them to raise your rate. You also have to be prepared to pay the balance in full if the company tries to screw you somehow.

This is no different than anyone else who uses leverage for investing, and 3.9% isn't a bad rate, just so long as this isn't all the money you have invested (or even a big chunk of it). I'll even go so far as to say that you shouldn't make payments higher than the minimum, invest the extra money instead. The way I see it, you're not really in debt if you have enough in savings to cover what you owe.

This is not for the conservative investor, and do not do it if you have any doubts about your financial position or your willpower to use a credit card wisely.

Bill


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Author: Harrywa Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23452 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/7/2000 9:18 AM
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I have compromised with a 3.9% 'till paid off deal. I won't borrow more, but I used it to pay off about $5,000 credit card debt incurred when we took a vacation - we use a 1% rebate card and were going to pay out of savings/current earnings - we don't normally carry any credit card balance.

Instead, we are making a $100. payment monthly and paying down our 6.25% mortgage by an extra $300 per month. The mortgage rate will jump to 8.25 in March, so I see some real savings in the long term.

But I agree with other posters - I wouldn't specifically borrow against this to invest, in fact I wouldn't use it unless I could easily pay it off immediately, but that's my style more than anything. I guess someone could borrow against it and get a CD (about 6% for two years?) and bank a guaranteed spread. (Hmmm...have to look into that, maybe it's not such a bad idea.)

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Author: Tunneller Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23455 of 308230
Subject: Re: 3.9% until paid off deal. ??? Date: 1/7/2000 9:44 AM
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I think taking the 3.9% loan for a year is a good idea. You might want to arrange an automatic monthly repayment from another account so that it is impossible for you to get hit by a late fee.

There is slightly annoying tax twist. Despite the fact that you are taking the 3.9% hit as an expense of your investment strategy, you will not be able to take a tax advantage because the IRS will view it as "consumer interest". If the interest was accumulated on margin then you could claim it. Seems unfair to me. If you didn't use the CC at all other than the initial loan then maybe you would be able to persuade the IRS.

A related argument is that if someone has $20000 invested in stocks and an average monthy balance of $1000 cc debt. Then the decision to not pay off the CC is also an "investment decision", even if its a bad one, so the CC interest should still be deductible. No way the IRS is going to buy that though!

Regards, Tunneller

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