How To Outsmart the Bank
We have all seen the offers with introductory rates or free trial periods. They are available for various products including credit cards, cable television and online shopping websites. Banks make offers to open a new credit card with a 0% introductory Annual Percentage Rate (APR) for one year. There are also offers to transfer the balance from your existing credit card with a 0% introductory APR. That means the entire amount you use to make for your payment will be going to pay down the credit card balance. It seems exciting to think that you will finally be able to pay down your credit card balance. It’s like getting a free loan! Who wouldn’t want to take advantage of this offer?
There may or may not be a catch with these offers, but the bank plans on catching you. Remember, banks are a business and are in business to make money. It is important to read about all of the rates and fees before taking advantage of any promotional offers. One of the big problems is that most people think they are going to outsmart the bank by transferring the balance of their credit card and paying off the balance before the introductory period ends. That’s a great plan but if you were not able to pay off the balance without the introductory offer, then the chances of you paying it off with the introductory offer is slim to none. As stated in this blog post, if you do not change the way you think, then you are going to continue the same behavior. Even if you do not continue to spend, you are likely to have a balance when the introductory period is over. What’s the big deal, some may ask? The worst that can happen is that I keep making payments like I used to make. Not so fast.
According to the Federal Reserve, the average American has a credit card balance of $6,375. Let’s look at a hypothetical situation and say that you have a $2,000 credit card balance with a monthly payment of around $20.00, and you took advantage of a 0% introductory APR for 12 months. Instead of making the minimum monthly payment, you decide to make a monthly payment of $25.00. After 12 months the APR goes up to 31.65% for a bank that targets college students (this is an actual APR for a credit card offer my son received but rates will vary) If the APR goes up to 31.65% and your new balance is $1,700 ($2,000 – $300), then you will be paying at least $44.84 in interest on your first payment. If your minimum monthly payment is $60, then only $15.16 would go toward the principal to pay down the balance for that first payment. . If you did not make any additional purchases, then the new balance would be paid off in approximately 53 months, and you would have paid approximately $1,470 (almost same amount as the new balance) in interest plus some additional fees. Now, that 0% offer cost you over $1400! Remember to make sure you read everything before making a decision to take advantage of any promotional offers.
The bank is counting on you to make more purchases and to make only the minimum monthly payment. Then they can make more than $1,400 or so in interest from you. If you do not have discipline, then you may use the old credit card with a $0 balance and start using that to make purchases. Then you defeated the purpose of taking advantage of the offer in the first place. The way to outsmart the bank is to make a budget, manage your money, and live within your means so you do not have to use your credit card to make purchases you cannot afford. Sounds like a plan to me. All the best!
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