Low interest credit cards seem wonderful when you first find out about them. Like Fluffy asleep in the attic, so sweet – what could possibly be wrong?
Many moons ago, when interest rates hit their first historic low, finance companies came out with credit cards that offer to transfer an existing card balance and charge NO interest for a set period – 0%. And at first it was in fact 0%, for a year, sometimes longer. Or you could use the balance transfer to pay for things like a new bathroom or a vacation, instead of using your lame 7% line of credit, or applying for a traditional bank loan that you had to go down on one knee for.
You didn’t need to have a financial advisor to figure out that 0% was better than any other percent. The first few times the NO interest period ran out you were able to pay off the balance without experiencing the pain and humiliation of a month’s interest at regular rates.
When I say “pay off” I don’t mean pay off the debt. I mean you were able to transfer the balance from the NO interest credit card when the interest free period ran out, on to your lame line of credit until the next NO interest offer came in, which it inevitably did. It got so that it was infuriating to pay 7% interest while you waited for the NO interest offers, which were timed so that you usually had to wait an interest cycle or two, not saying that the credit card companies were colluding with the banks or anything (cartel much?). This worked well for several years until life got in the way and there was no room on the line of credit for the switchback. Fluffy was beginning to wake up but still looked pretty cute.
You may have wondered, naively, how the credit companies could make money, until the one, two, three times that you didn’t move the interest free balance quickly enough and ended up with a month of interest that in the old days would have been referred to as “usuary” – an illegally high rate of interest intended to drive the debtor into bankruptcy. Then it made sense: for everyone that managed to transfer their interest free balance out on time – or actually pay it off! – there were many others who didn’t. And one month at regular credit card rates more than compensated the finance company for waiting for you to mess up.
Luckily, you thought, other institutions started doing the same thing. Every month offers came in. Even if you had never done it before, if you had any debt at all you had to consider it, with the best of intentions of paying it off. So you could now funnel the line of credit balance to a second NO interest credit card, pay off the balance on the first with the line of credit and then transfer the line of credit balance back when the next offer came along. And so on, and so on until you had several NO interest arrangements going. Fluffy full on is a pretty scary thing.
Even now, much later, it makes absolutely no sense to carry a debt at a higher rate of interest when a low rate of interest is offered to you, but you know that your “credit” is growing every time you go through the revolving credit door. You feel like you are in a bind and you are: at about $100,000 of low interest consumer debt (not your mortgage), they stop offering you credit. It is now difficult to get a mortgage or a car loan or refinance either of these when your unsecured debt is this high. When it comes time to revolve you have no where to go. And that’s when the credit card really starts making money – at 22%. You are now one of those people in the commercials who dreads opening bill statements.
It’s time to get help from a cash flow planner or a credit counsellor. Then read my posts about budgeting.
And recognize your credit cards for what they really are: a many-headed beast that needs to go back to sleep.