It’s a (credit) trap!?!
August 22, 2011 9:04 AM   Subscribe

With my recent credit card statement, I also received an offer for 1.99% interest on my balance for new purchases made over the next 12 months starting September 1. Cash advances and transferring of balances from other credit cards are not included. Is this too good to be true?

Am I missing something here? I know the credit card company is not doing this out of the goodness of their heart. Since I normally pay off the balance every month, even getting a few bucks in interest off of me is better for them in the long run. But it just feels like I am missing something in the fine print (forfeiture of first born, etc).

We are looking at doing some renos over the next few months and have secured a line of credit with a fairly decent interest rate, but it is higher than 1.99% (5.5 vs 1.99). If we are careful, would we be better off to make as many purchase as possible and carry a balance on the credit card for up to the 12 months and then pay off the outstanding balance with the line of credit? If I miss a minimum payment (something I have never done) the offer is revoked.

I am in Canada if that matters.

(I have had credit cards for over 20 years and in that time I have carried a balance probably less than 5 times. I use credit very carefully and judiciously.)
posted by Razzle Bathbone to Work & Money (17 answers total)
 
I'd imagine they want you to use your card more, to the point where you carry a balance more often, so they get some interest, condition you to carry a balance, and then can raise your rates later when you're used to carrying a balance.
posted by xingcat at 9:08 AM on August 22, 2011 [1 favorite]


Pretty common offer, actually.
posted by BurntHombre at 9:09 AM on August 22, 2011


Best answer: My partner, who has a relatively low credit-to-income ratio because he hates credit card balances, gets offers like this all the time.

They might have seen that your credit was pulled for a personal loan and decided to compete, as they could tell that you were looking to borrow money.
posted by the young rope-rider at 9:12 AM on August 22, 2011 [1 favorite]


Best answer: Look to see in what order the balance is paid. In most cases purchases and cash advances (the higher rates) would be paid after lower interest rates (the balance transfer). So if you had a balance on the card and then put on the reno, you'd be paying the 1.99 down while that pre-existing balance sat 'behind' it, accruing interest at a higher rate. If you made any purchases on the card while the balance transfer was on it, the same thing would apply - the interest charges would be differently applied to your different balances, with that balance transfer being paid first as the lowest APR. Also, if the introductory rate expires you will be assessed finance charges on your entire balance at the purchase rate after that period.

So they're hoping a couple of things happen: you either don't pay the card completely off prior to loading on the balance transfer or continue to charge, or that you don't pay the balance transfer off before the intro expires. And you also get mentally used to holding a balance, so you'll be more inclined to run up a balance after the offer is over.
posted by winna at 9:17 AM on August 22, 2011 [1 favorite]


What xingcat said, plus: credit card companies tend to be vague about when those offers expire once you sign up for them -- unlike a fixed-term loan -- under the assumption that you'll forget over the course of the offer, and they'll get at least one month when they can hit you up for the standard interest rate. So if you do take advantage of it, make multiple reminders of exactly when the promo rate expires.
posted by holgate at 9:17 AM on August 22, 2011


Best answer: The trend right now is that people are working down their CC balances, rather than adding to them. This means less revenue, less profit for the card issuers. So, the put out incentives for you to increase your balance with a special rate. If you do it, they're making 2% which at least covers their costs on a loan they otherwise would not own. At the end of the 12 months (or if, at any time, you transgress by missing a payment), they start earning the real interest rate.
posted by beagle at 9:19 AM on August 22, 2011


(And by "vague", I mean that it's often difficult to find out when the promo rate expires once you're signed up. It won't be enumerated in bold type on your statements or in online account management: the best you'll get is some kind of code associated with the offer.)
posted by holgate at 9:20 AM on August 22, 2011


Response by poster: Thanks, all good things to keep in mind. I have already put into my calendars the fixed date the offer ends. Plus the idea in general of carry an credit card balance gives me heart palpitations.

I also realize that the amount of credit I have available on the card, spread over the year even if I make all the purchases the day after the offer starts, the savings will not be huge. The credit card is also a cash back card. Combined the savings and the cash back will probably be 200-300 dollars.
posted by Razzle Bathbone at 9:22 AM on August 22, 2011


Make sure you can make the minimum payment even if you get laid off, sick, whatever! It might be different than the payment for the loan.

I'm not sure about Canadian law regarding them being able to change the minimum payment amount so that's something to research.
posted by the young rope-rider at 9:27 AM on August 22, 2011


Read the information on the back of the statement pertaining to the cash advance. Usually, they will take a fee of $20 or 3% (or something like that) of the total borrowed amount, whichever is higher. For instance, if you borrow $5000, you will be paying the 3% of $5000 as a fee.

You will be required to pay the entire amount in full on or before the date specified or you will incur the highest interest that the credit card collects (normally 21%.)

Call and ask questions about how when they want the entire amount borrowed before you borrow the money. It is actually a good deal if you are able to pay the entire amount before the due date of your borrowed amount. If not, you will be charged very high interest in which case you would have been better off to borrow from your bank at the 5% interest.

Also, make sure you don't use that credit card after you get the cash advance until you have paid the full amount off because it may cause for the new charges to incur the high interest at the next billing statement. Credit card companies are in the business of making money, not being nice no matter how good your credit is.
posted by Yellow at 9:30 AM on August 22, 2011


There are two main problems here.

First, 1.99% interest? Hold out for 0%, as that's the normal promotional rate for balance transfers.

Second, what they aren't telling you is that there's almost always an up-front feet applied to balance transfers, usually between 1-3%. So even if they don't charge you any interest, they're still making money.
posted by valkyryn at 9:31 AM on August 22, 2011


Read the information on the back of the statement pertaining to the cash advance.

The OP's offer is on "new purchases made over the next 12 months", so balance transfer / cash advance fees don't apply here.
posted by holgate at 9:39 AM on August 22, 2011


There will be very specific terms. Many people will make an error and not meet the terms, and every bit of that 1.99 rate will be converted to something crazy, like 24.99, from the beginning of the agreement. Enough people make errors that they will make gobs of money. You sound very organized, so it's probably a good deal for you.
posted by theora55 at 9:49 AM on August 22, 2011


Response by poster: Thanks for the input and advice everyone.

We were planing on making the purchases anyhow. Mostly appliances and household things (new bathtub, fixtures in bathroom and kitchen, new dishwasher etc) that we pay off each month as we bought. This way we can make all the purchases at one time and then pay off whatever is left outstanding in August 2012 with the line of credit.
posted by Razzle Bathbone at 10:03 AM on August 22, 2011


FWIW, I've noticed these offers to be very cyclical, depending on the economy. A few years ago, when everyone was more flush and less thrifty, I was constantly seeing offers for low interest on transfers. You'd never see a deal like the OP was offered. Now that the economy sucks and fewer people are buying things, I'm seeing more and more "0% interest on purchases" deals.
posted by mkultra at 11:34 AM on August 22, 2011


These kind of offers are being made because the Fed is lending to banks at ultra-cheap rates. The current rate is at 0.75%. You'll be paying them 1.99% which is a good profit, PLUS the merchants will be paying interchange fees to your bank as well for every purchase you make. More Profit. So, no, this is not too good to be true at all. Even if you don't have a current balance and even if you pay this off on time, the bank will be making money.

P.S. I just realized that you are in Canada, so I'm not sure how these things work over there, but this is the situation in the U.S.
posted by thewildgreen at 7:58 PM on August 22, 2011


Yes, do keep in mind that credit card companies refer to customers who pay off their balances every month as "deadbeats".
posted by Short Attention Sp at 5:30 PM on August 23, 2011


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