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Author: CPAScott Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308883  
Subject: Re: An Ethical Thought Date: 9/15/2005 4:31 PM
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Is there any time when a consumer is at an advantage using a credit card and not paying it off (i.e. using it and paying interest, I know there is an advantage to using a cc when you pay it off each month)?

Yes. When you are using the credit card as a loan.

However, using credit cards as a loan, IMHO, should only occur under two circumstances:

1. The credit card is offering a lower rate than an existing loan you currently have and are trying to pay down.

2. The cash you were intending to use for the purchase is earning more in interest via an investment than the credit card rate.



Let's look at these further.

I can use an example for #1. I currently have student loan debt. Thanks to my unfortunate timing of consolidation, the rate on one of my loans is fixed at just under 7%.

I recevied an offer from one of my credit cards (which carried no balance at the time) to transfer over an amount up to my credit limit at a fixed interest rate of 3.9% for life. All balance transfer fees were waived.

I calculated out how much the payment would be (2.08% of the balance) and determined that I could move $6600 without impact to my budget. Thus $6600 of my loan would now be at 4% instead of 7%. In the long-run, I come out ahead.

HOWEVER, there are a few conditions that MUST exist for you to employ this strategy.

1. The rate on your credit card must be fixed.
2. If the fixed rate is temporary, you must pay the balance in full before it rises, provided that the new rate will exceed the rate of the loan you are transferring the balance from.
3. YOU MUST HAVE NO OTHER OBLIGATIONS ON THE CREDIT CARD -- and NEVER use it for general purchases. If you do, your payments will be applied to the lower rate balances first, while the higher rate balances sit there generating interest. Be sure not to fall into this trap!
4. The balance transfer fees must be waived, or the net savings from the lower rate must be substantially sufficient such that the end result of paying the balance transfer fees is nullified by the interest savings. This rarely happens though, so the general rule is if there is a balance transfer fee, pass on the offer.

Also recognize that the transfer of some loans to a credit card may be moving secured debt to unsecured consumer debt. It will also affect your FICO score negatively.


I can also use an example for #2. A few months ago I bought a new HDTV. The store was offering 0%, no interest financing for 18 months. Although I had the cash available for the purchase, I financed it to allow my cash to earn interest while the loan collected none. I will pay off the balance before the 18th month.

While this example is on a no-interest card, the strategy could still be used on a interest-bearing credit card. Say you wish to make a purchase for cash by taking it out of a high yield money market fund earning 6%. A credit card you have has a temporary rate for 6 months of 4%. You'd come out ahead by financing the purchase on your credit card for 6 months, and then paying it off (net gain 2% for 6 months).

HOWEVER, as with the first scenario, there are a few conditions that MUST exist in order to use this strategy.

1. You MUST have the cash available for the purchase. This strategy is NOT to be employed to buy something you couldn't of paid for with cash!
2. If the credit card has a teaser or introductory rate, you MUST pay it off the MONTH BEFORE the teaser rate expires. In my example above, the credit card is actually accruing interest (at 21%!) which is forgiven as long as I pay it off prior to the 18th month. This payoff is IMPERITIVE!!



f everyone paid their cards off each month, there would no longer be a credit card industry, right?

Credit cards earn income from transaction fees paid by merchants. Consider American Express. The original AmEx card didn't have an interest rate -- you HAD to pay it off. These used to be called "charge cards" -- buy now, pay at the end of the month. Carrying a balance wasn't an option. AmEx made money by charging the merchants for each transaction.


Banks lending money for homes and consumer credit for cars seems to be the only reason for credit.

Many would say the ideal is to pay cash for cars.

Education loans are another viable reason for credit. IMHO, Mortgages and education loans are "good" debt -- and are tax-deductible (even if they weren't tax deductible they'd still be acceptable debt -- few people can buy a house or pay for a full college education with cash).

'm just throwing this out. I was thinking "what would it be like if no one had credit cards?"

As long as credit is used WISELY it is a fine product. Most of us, however, do not use it wisely. We use it to BORROW.

The Golden Rule of consumer credit --

BUY ONLY WHAT YOU CAN AFFORD TO PAY WITH CASH!
(a.k.a. PAY OFF THOSE CREDIT CARDS EVERY MONTH!)


Good topic.


CPAScott
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