What About Those Checks My Credit Card Company Always Sends Me
You know those checks from your credit card company offering low to zero percent interest rates they send you to transfer a balance or just write one to yourself? Do you ever wonder why your credit company, the same one that charges you 14 to 20% interest all of a sudden wants to make you a low to no rate loan? Well I have a theory.
Recently while reading the really fine print on one of these offer I hit on what I believe the key to these offers is, balance trapping. What the offer said was that the company will apply my payments to pay off the lowest rates they have given me first. Seems innocent enough until you realize that that means any balance at your normal (I mean high) rate is effectively trapped while all your payments go to pay back the zero rate money. Not only is the balance trapped but it is growing with interest since none of your payment is being applied to it.
Let me provide an example:
Let’s say I owed $3,000 on my credit card and I wanted to use one of the ZERO percentage rate checks from the company to get another $2,500.
Typically you can get the ZERO percent check for about 8 months before it rolls over to your regular interest rate and you pay a fee of around 3% to use it.
So I write the check for $2,500 and pay off something or go to Mohegan Sun for the weekend. They charge me $75 for the 3% fee and off I go. For the next 8 months I make the minimum payment of just 2% of my outstanding balance or $50.00 to service the account (remember I went to Mohegan Sun so that is all I can afford). At the end of 8 months what does my account balance look like.
Well my original $3,000 balance has grown to $3,300 (assuming my rate was 15% on that money) because none of my payments were applied to that balance. I paid $75 in fees to get the advance. Now because I had a zero percent rate on the $2,500 advance I have been able to pay that down to $2,100 BUT here is what my statement now looks like 9 months later:
I now owe the original balance plus interest of $3,300 PLUS the $2,100 left over at the end of my ZERO percent term for a new balance of $5,400 that I now have to pay at my higher REGULAR interest rate.
Now someone will argue that if used responsibly these cash advances can be an easy way to lay your hands on some money. All I have to say is buyer beware.
Next time let’s talk about “universal defaults” and how one missed payment on any of your credit cards can send them all through the roof.
