The Capitalist Maven

One thing that, I think, makes me unique among Americans is that I’ve never paid a dime of interest charges in my life.  I’ve always rented my housing.  I paid cash for the one car I’ve purchased, the previous junker having been given to me by my parents after I graduated college.  I’ve borrowed 0% money from credit cards, to engage in interest rate arbitrage.  But in all I’ve never paid for the privalege of using somebody else’s money.

I realize I’m the oddball when I hear friends talk about their car payments, virtually everyone either: has one or has recently paid it off and is well on their way to financing yet again.  Why would you use credit to purchase a depreciating asset, that will be worth considerably less than you paid for it by the time you pay it off?  I hear things like “I can’t wait to pay this car off so that I can get a new one” or “hopefully we can get a few more years out of our first car so that we can finish paying off the second first.”  This kind of thinking traps you into financially dangerous situations.  The decision to replace a car should be made when the car is no longer practical.  Situations such as, when it’s no longer able to get you to work reliably or when a significant expensive component fails and it’s no longer economical to repair.

I can understand a salesman’s obsession with credit.  It’s much easier to sell a “$30 a month” Bose sound system than a “$2000″ Bose sound system as optional equipment on a car.  Talking monthly payments also helps him to obscure calculations and do some math trickery to maximize your spending.  The $20 extra per month for you could turn into hundreds for him.

Credit certainly does have a place.  For a person fresh out of college with a job but no car and no money yet, credit allows that person to get the car that enables them to get to work.  For them, they get return on their investment.  The interest payment allows them to go to work to make even more money.  Compare this situation with a person who already has a car coming out of college.  It may not look great but there’s a good chance Dad probably did his research and got you a nice reliable car to take to college.  In this situation you can already get to work and make the big bucks.  What investment return does paying those interest charges get you?  Not a damn thing.

It’s unfortunate that the US has become so reliant on credit. Just look what’s happened to the economy in the past 2 years.  The banks reduce their lending and the proverbial “stuff” hits the fan.  It’s not like they even reduced their lending much.  If you’re the type that pays your bills ontime and aren’t already fully leveraged there’s a good chance banks will lend to you.  Just turn on the TV virtually any time and see the advertisements for cars, along with financing offers.  The money is there to be lent, only now it’s only to the right borrowers.  This small reduction in lending is enough to plunge the stock market thousands of points.

Maybe I’m the crazy unusual one again, but I think when the market hits bottom and starts heading up again I hope it’s based on normal lending patterns, the kind where the good borrowers get credit and others pay cash.  If we start the economy again with constrained credit, we’ll find a way to make it work.  The money will still be there to be lent to people making investments:  in careers, in businesses, and other credit strategies that provide returns.  At the same time, credit will be limited for consumerism.  In other words, provide the credit for production, not consumption.  Sorry “$30 a month” Bose sound system…

Jon Finance

The only debt I carry on credit cards is 0% arbitrage money that I reinvest at higher rates. For many people however, just getting your high interest cards paid off is a challenge. What follows is some strategies to minimize the interest you pay and help you get them paid off faster.

First of all, you need to determine how you ended up having all that high interest credit card debt in the first place. Did you splurge on a big weekend in Vegas and spend more than you could pay back? Did you go a little crazy redecorating the house? Did you have unexpected medical bills? However, if you have a habit of spending beyond your means, you must get that under control before you can have any hope of getting those bills paid down. Strategies for getting your spending under control is up to you or a topic for another article .

You need to dig out all your latest credit card statements. On your statements, near the end of the bill, will be a summary of finance charges. You need to make note of all the different finance charges on your cards. You will need to concentrate on getting the absolute highest rate paid off first. So if you have $500 to allocate to payments each month, first pay the minimum on all cards, then pay the remainder of the $500 towards the card with the highest rate.

Interest charges accrue continuously(not just in 30 day chunks), so when you have some extra money, use it to pay off your card immediately. Don’t leave it sitting in the checking account waiting for it to be due, go online and make a bill payment immediately. Most credit cards allow you to pay 4 or more times per month using their payment system and if that is not enough, just write out a check and send it in. An added benefit is that it’s paid before you’ve had chance to spend it, without the money burning a hole in your pocket…

On to the more advanced strategies. You probably receive offers in the mail all the time from both your existing cards and new credit cards offering low rate balance transfers. If you don’t, just ignore this section. These offers can vary greatly in their value. For example I posted earlier about a 0%, no fee offer I received from my Citi Diamond Preferred card. This is an example of the best possible offer you will receive. Suppose you have an existing balance at 12% and you receive an offer for 4.99% for the life of the balance, this is obviously a very good deal for you as you’ll be saving 7% in interest charges. Be sure to read the fine print as there are typically fees associated with the balance transfer. These fees are usually 3% with a $5-$10 minimum, often with no maximum. When there is a fee involved you need to determine how long you think it will take you to pay it off. If you plan to have the balance paid off in 6 months, a 3% fee equates to 6% APR so it’s unlikely you’ll benefit. But if its going to take you 2 years to pay off the debt, a 3% one time fee is a small price to pay.

So here’s the quick summary:

1. Pay highest rate card first.

2. Pay the bills as soon as you have the money.

3. Take advantage of offers to lower your effective interest rate.

If you have any questions or comments feel free to post and I’ll try to respond.

Jon Credit cards Credit cards, debt, high interest, paid off

I normally only give my credit card statements a passing glance. All of my transactions are downloaded automatically to Quicken. However in my April statements I was glad I looked. My Citi Dividend card had an offer for 0% balance transfer until 11/2008, with a $75 max fee. Then I checked my Diamond Preferred card, it had an offer for 0% balance transfer until 11/2008 with no fee. While I often get these kind of offers with new credit cards, it’s rare to see them on existing accounts.

One of the nice things about Citi balance transfers is they will just send you a check or you can write out a check yourself using the checks that come with your bill and still be eligible for the balance transfer rate. Be sure to read your particular fine print carefully though as this can and does change.

The best way to use these balance transfer checks is to take the money and put it in a high yield savings account. This is called interest rate arbitrage. You might read in the newspaper about hedge funds doing it as well. The difference is that hedge funds borrow money from much larger sources, such as Japanese banks, at low rates and then invest that money at higher rates. In Japan, banks will lend you money for as low as 1% interest. The hedge funds then reinvest this money at European or US banks paying 3-5% interest and pocket the 2-4% difference. Obvious this practice is not without risk, as currency exchange rates can change rapidly.

Similarly, you can borrow from a credit card at 0% and reinvest at a higher rate. The idea is though, that you want to minimize your risk as when that balance transfer promo period is over, the rate skyrockets. For this reason I recommend sticking with FDIC insured high yield savings accounts. You want to be able to pay back the balance in full the month before your rate skyrockets.

With 0% and no fees, its a given that you will make money. How much depends on your credit line, your high yield savings interest rate, and the length of the promo period. So if the promo period is 1 year, you borrow $10,000, and the interest rate is 3%, you’ll make ~$300 for doing nothing more than making minimum payments every month for a year and paying in full in month 12.

Jon Credit cards 0%, balance transfer, citi, credit card

If you’ve listened to the radio or watched TV lately I’m sure you’ve seen or heard the commercial telling you “it’s a great time to buy.” Here is the youTube of the commercial: