The other day I received a “special offer” from my credit card company, along with a set of blank checks. The offer stated that I could use these checks to pay for anything I wanted, for any amount (up to my credit limit) at a promotional 3.99% fixed APR until the balance is paid. They suggested I use it to make a down payment on a new car, take a vacation, or make some home improvements. Sounds wonderful, doesn’t it? Yes…until you read the fine print!
These checks once again reminded me of the trap that I talked about in an earlier blog, but is well worth reiterating this week after Christmas when most will start receiving their credit card statements for all those financed Christmas purchases. Many will be shocked by the total owed and looking for some way to ease the burden. These low-interest checks certainly appear on the surface to be an answer to a prayer, but buyer beware! There are three major gotchas with these checks that will have you crying the blues if you don’t take the time to read and understand the fine print!
- Transaction Fee: In the fine print it states that there will be a transaction fee of 3% applied to the amount of the check. So, let’s say you write a check for $5,000 to pay for your family’s Christmas vacation. That means you will be charged $150 to write that check. Well, you say, maybe it is worth it in order to get that low interest rate until the balance is paid off.
- Payment Allocation: That brings us to the next gotcha. In the “Important Information” on the back of the offer, the credit card company states that it MAY allocate payments to the balances with the lowest APRs before applying payments to higher APR balances. The operative word “may” really means “it has the right to” and trust me, it WILL allocate your payments to the lowest rate first. Since you probably made other purchases with your credit card and those purchases naturally accrue interest at your standard higher interest rate of say, 21%, those purchases will now be the last in line to be paid off. By writing one of those low-interest checks, your next credit card payment will be applied to that lower-rate check balance instead of toward your new, higher-rate purchases. This means your new purchases will sit there, building up interest at the higher rate, and you can't stop it without paying off the low-interest balance in full, the very balance you had hoped to pay off over time. So, unless you make no other purchases, of what possible benefit are these low-interest checks?
- Grace Period: The final gotcha is that there is no grace period on these checks. Interest starts accruing from the transaction date.
Instead of falling prey to one of these offers that can actually compound your credit card debt problem, use this time to make a resolution and begin a plan to put yourself on the path to financial freedom in 2008.
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Don’t let embarrassment, stigma, or the sense that negotiating your way out is not the moral way to get out of debt. The Credit Card Industry is one of the most profitable industries in the United States. Citibank alone earns more profit than both Wal-Mart and Microsoft. Yet this industry has more complaints filed against it than any other industry in the U.S. Getting debt free and starting a financial plan to build wealth instead of debt is one of the best things you can do for yourself and your family.
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