How (and when) to use credit card promotions
Mar 21 '02
The Bottom Line Credit card promotional rates, can save you money (if you have long-term debt), if used carefully.
Carefully
Seriously, if you use promotional credit card rates, there are three major things to consider: exactly what transactions the rate applies to; the promotional end date; and the effective interest rate.
Transaction types and time
Some offers are activated only for advances made directly to other creditors (not affiliated with the same bank), some are activated only for cash advances directly to your checking account, and some apply to all advances. Don't use the wrong type of transaction to "activate" the offer.
Once the offer is activated, some apply only to the activating advances, some apply to all cash advances made during the promotional activation period, some apply to all cash advances made during the promotional period, and some apply to all transactions (purchases or cash advances) made during the promotional period. Make no transactions on the card which are not covered, or you'll be paying the regular interest rate on those transactions. Also note that all creditors now specifically state that payments will be applied first to the lower-interest rate transactions.
Very few (if any) offers apply to existing balances on the card. If you have a balance on the card, or if it's a card you regularly use, pay it off before activating the offer. Often (but not always), if your payment is received before you activate the offer, the existing balance is considered paid off, even if the offer is then activated during the same statement period.
If the offer is made by a "check", and it says the check must clear by (say) March 21, that means it must clear by March 21. If it is to be deposited in your checking account for later disbursement to creditors, deposit it by March 14. If it is to be mailed to a creditor, mail it by March 7. Even if the offer is made by check, you can often call the phone number in the offer and have the money transferred to your checking account or directly to the creditor.
The promotional end date
Pay off the card before the promotional end date.
Pay off the card before the promotional end date.
This bears repeating. Look closely at the date. Some promotions now state that they end in (say) October, but if you read the fine print, they may state that the regular interest rate resumes in the billing period containing October 1, say that you want to pay off the card with your normal payment in September.
Effective interest rate
Suppose you have dozens of promotional credit card offers each month. Which one(s) do you choose. You could calculate the true APR, but I usually calculate what I call the effective interest rate. The formula I use is:
effective_rate = (rate + (fee/amount) x (12/term)) x (1 - tax_factor), where:
rate is the stated annual interest rate
fee is the cash advance fee (often 3% of the advanced amount, with a minimum of $5 and a maximum of $40)
amount is the amount advanced
term is the number of months the rate is good for (often 6, sometimes 12, Providian is 3). If the rate is good for the life of the balance, use the time you expect to leave the balance open, or 18, if you really are not going to use the card for anything else until the debt is paid off, and you pay only the minimum payment each month.
tax_factor is 0 if the loan is not a deductible home equity loan, and your marginal tax rate (15%, 27.5%, etc.) if the loan is a deductible home equity loan.
If that rate is more than what you're presently paying on long-term debt (or would be when its promotional period ends), don't activate it.
Also, note that fee structure.. With the example given, if you make 2 $100 advances, you'll pay $10, while if you make one $200 advance, you'll pay $6. For $1000s, the numbers are $60 and $40. For $10,000s, the numbers are $80 and $40. Always make as few advances (subject to a cash advance fee) as possible.
My related reviews (only if you're considering a promotional rate on a home equity loan):
http://www.epinions.com/content_881041540, on Marginal Tax Rate
http://www.epinions.com/content_1104715908 on Mortgage Interest
Summary
Credit card promotional rates can save you money (if you have long-term debt), if used carefully.
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Epinions.com ID:
Arthur.Rubin
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Member: Arthur Rubin
Location: Brea, CA, USA
Reviews written: 97
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About Me:
Expert in mathematics, computers, income tax, with a wide variety of interests.
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