Do Balance Transfers Always Make Sense?

Balance on this!

If you've ever carried a balance on a credit card, you've probably also considered setting up a balance transfer to "hide" that balance and not pay interest on it for a while. I don't know about you, but I receive a handful of balance transfer offers in the mail every month, and those "0% APR for 12 month" offers can be very tempting.

But hang on a second. Does it always make sense to transfer a balance from one credit card to another, even at 0% APR? Let's take a look at the fine print.

I was perusing just such an offer from Discover Card when I saw that the balance transfer charged a 5% immediate fee to facilitate the transfer. Big deal, you might say. If I'm being charged a 19.99% APR on another credit card, surely paying 5% instead makes more sense.

The problem comes from just how that interest is charged. As I stated, the 5% charge is immediate, but what you might not realize is that the 19.99% charge is spread out over the year. What does that mean in real figures?

If you transfer $1,000 to Discover, you will immediately pay a $50 fee to do so. This balance will not be charged interest for a year, however.

If you kept that $1,000 on the original card at 19.99% interest, you would only face an interest charge of $16.66 the first month. This is because while the interest is higher, the charge is then divided across the 12 months. Therefore, your monthly interest charge equals $1,000 X .1999 / 12 = $16.66. With this being the case, it would take over three months for that $1,000 on your original credit card to cost you in interest what you'd be paying immediately with balance transfer.

What should you do in this situation? It depends on how quickly you can afford to pay down this debt. If you think you pay an extra $333 per month towards the principal, it makes more sense to keep it on the original credit card (particularly since the interest will be reduced with each payment). If, however, you think you need to pay this amount down over the course of a year, then the balance transfer is the better option.

So what should be your takeaway? Balance transfers are the Trojan Horses of personal finance, and, in this case, it makes a lot of sense to look this gift horse in the mouth.

Photo by SeeMidTN.com.

Fed Rules Make Credit Approval Harder to Come by for Stay-at-Home Spouses

Money can't buy you love, Storm Trooper. Sorry.

The Federal Reserve last year announced a new rule that requires credit card companies to evaluate personal income, rather than household income, in making credit card approval decisions. Not only did this move cause a stir among consumer interest groups, it also left many of the folks who aren’t primary household earners understandably unsure as to whether they would be able to obtain credit.

Credit scores are, simply put, a valuable commodity. Decision makers from banks to landlords to employers use these three-digit encapsulations of our fiscal responsibility to make decisions regarding suitability for loans (not to mention corresponding interest rates), jobs, and apartment rentals, just to name a few things. As a result, the difference between excellent credit and limited credit is an extremely expensive one that could create roadblocks for an individual who finds him or herself financially independent for the first time in years, as could be the case in the event of divorce or the passing of a loved one.

That is why the Fed’s new underwriting rules are so troubling to many stay-at-home spouses. Credit cards are generally considered the most attainable and efficient credit building tools, as they report information to the major credit bureaus on a monthly basis and do not require the same debt burden as a loan. However, in the aftermath of this new rule being put into effect, two things have become clear: 1) The Fed’s decision was logical and 2) It doesn’t completely shut out stay-at-home spouses from credit access.

Some Ethics of Spending

So minutes, hours, days, month, and years,

Passed over to the end they were created,

Would bring white hairs unto a quiet grave.

Ah, what a life were this! How sweet, how lovely!

-- Henry VI, Part 3, II.v. 38-41.

I was watching the ... documentary? filmed series of mostly one-way conversations? I'm not sure what to call it ... Examined Life on Netflix the other evening (because I am a pretentious jerkwad)*, and one of the speakers in the film, Peter Singer, said something obvious in a way I hadn't considered before. He posed the following hypothetical situation, and he then asked people how they would handle it.

Here's the scenario:

A screen that offers time to reflect.

Suppose you're walking in a park on a bright, sunny day, and you walk past a pool that's only a foot deep. You notice that a young child has waded into the pool, and the child is obviously having some difficulty. After watching for a moment, you realize that the child is about to drown, and you know that if you act right now, you can save the child's life. This action will involve walking into the pool (which poses no danger to you as an able-bodied adult) and retrieving the child. The only reason that gives you pause is the fact that the shoes you're wearing are expensive, and by walking into the water, you will necessarily ruin them. You know that there's no time to hesitate if you choose to rescue the child; another few seconds, and the kid will drown. What do you do?

I'm fairly certain that approaching 100% of the people reading this would decide to save the child's life because, on a very basic level, most people agree that the direct saving of a life is more important than shoes, expense be damned.

However, Singer, as philosophers are prone to do, doesn't let the question stop there; he goes on to ask, basically, if you would allow your money to be lost by ruining your shoes to save a child's life, why not, in the first place, instead of spending the money on the expensive shoes, spend that money by donating to one of the various, valid charitable organizations that use your money to feed starving children?

I know some of you reading this will immediately claim that Singer's question poses an absurd reduction. After all, why go the movies when you could help at a soup kitchen? Why read a blog post when you could be learning first aid? Why do ANYTHING immediately gratifying and enjoyable when you could be helping others?**

But to react in this way is to miss an opportunity for reflection. There is truth in what he says. After all, economics studies how people spend their finite resources, and it follows (by definition of finite) that spending money on one item necessarily means that that money is unavailable for other expenditures (credit cards work to make people feel like they're circumventing this, but as anybody who has read a personal finance blog knows, the reckless use of credit cards frequently ends in disastrous results).

It is important to realize that each dollar we spend is a dollar we can't spend another way, and I think it's worthwhile to remember this on a weekly, daily, or even a transaction by transaction basis.

What do you think? Do you consider where each dollar you spend could have gone, and/or what help it could have provided? Let me know in the comments.

*Though, to be fair, you could probably add that clause to the end of nearly any sentence I've written on this site, and it would remain accurate. "Should I Drop Chase Bank?" because I am a pretentious jerkwad? Here's my Lending Club update because I am a pretentious jerkwad. Here are 6 things you don't know about me because I am a pretentious jerkwad. You get the idea. Apt, no?
**I would argue that helping others can be both gratifying and enjoyable; I find that little in life is truly an either/or situation.

Photo by psd.

**This post was featured in the Carnival of Personal Finance #364.**

Review: Biodegradable Discover More Card

Once one is able to get his or her spending in check, the studious use of a credit card can be very beneficial.  After all, it has been said that while the lower and middle classes work for their money, the rich get their money to work for them.  While this statement is generally used to encourage people to invest, the careful use of a rewards credit is another way to get your money to work for you.

As far as rewards credit cards go, the Discover More card is a good option.  You can get 5% back on specific categories of purchases (after you sign up for that feature).  You automatically get 0.25% on the first $3,000 worth of purchases in a year, and if you spend more than that, the percentage automatically bumps up to 1%.  So long as you pay off your balance prior to the due date each month, Discover is basically paying you to take a short term loan from them.

Another positive item about this card is that there is no annual fee for its use.  However, all purchases are charged between 11.99% and 20.99% if payment is not received by the due date.  The Discover More credit card is also offering a 0% introductory APR for the first six months of your account's life.

One other cool item about the card is that it is allegedly biodegradable.  The Discover website claims that the card will biodegrade in five years in normal landfill conditions (though I would be interested in how long it takes other credit cards to biodegrade as a comparison).

Bottom line: the Discover More credit card offers a good cash back rewards program with no annual fee, and it provides an interest rate that is competitive.  If you are in the market for a rewards credit card, this is not a bad choice.

(Disclaimer: this article was posted as of the date of the post, and the terms for the Discover More card were current as of that date.  Please make sure to check the terms if you sign up to ensure that they are still comparable.)

Does Your Credit Card Make It Difficult?

I am happy to report that for the last several months, I have been paying my credit card off in full every month. However, and maybe I'm a weirdo, but I have a hard time paying a big lump sum of money all at once. For example, if I owe $500, it's easier for me psychologically to make two $200 payments and one $100 payment than it is to make one large payment of $500.

It's unreasonable, I know, particularly when I also know that I have been able to budget for the whole amount due. What can I say? At least I'm paying it all off.

Normally, my smaller payments work swimmingly. I make my smaller payments, my card's balance shrinks, and I finish the balance due off by the end of the month. However, a few minutes ago, I ran into a small snag.

My primary credit card is the Chase Freedom card because I like cash-back rewards combined with no annual fees. I made a small payment on 7/31, and I tried to make a small payment again today, but I received an error message that stated that I was unable to make my payment due to the fact that I had submitted another payment within the last three days.

I can't think of a good reason why Chase would implement this policy, other than they are trying to "catch" people, like me, who make smaller payments. While it's not a big deal for me not to be able to pay today (my billing period end date is 8/26), if I were facing this situation on the last day that payments were due (and thus, facing the prospect of getting charged interest on the balance carried), I'd be pretty upset.

The only logical reason I could give for Chase to implement this policy is that it must cost the banks something to send money to one another. However, Chase is my primary bank, so Chase is denying me the ability to move cash money from one Chase account to another Chase account! It's ridiculous!

Have you ever hit up against credit cards making it difficult to make payments, or otherwise hassling you in an (apparent) attempt to collect fees from you? How did you work it out?