Let me start by saying that I know how harmful credit cards can be. The average credit card balance per American household is approximately $5700. Iím assuming that is going to go up in the near-future due to the aftermath of a pandemic. Unemployment is up to record highs. Uncertainty is everywhere. Businesses have folded altogether. And another stimulus is unlikely to be enough for most people struggling currently. A lot of people are on their way to what we are calling the cash cliff. Gloomy enough picture yet?
So what do we do when we have a cash issue? We borrow (thatís not a suggestion, itís a commentary on the most common result). The only other alternative is to sell your assets to free up some cash. When we borrow, we create debt. If there is no way to avoid creating debt, then the next best thing is to make sure it is as INEXPENSIVE as possible. Interest rates are so low right now, and the banks (believe it or not) are hurting too. One of my all-time favorite strategies was the credit card game. How does it work? Is it still available?
Things are always subject to change, but when I was still in school and working two jobs (making next to nothing), there were times when big purchases were necessary. The time-tested conventional wisdom was that borrowing money for free was not a bad idea, as long as you can pay it back. This brought me to the zero-interest financing solution.
Now letís start with a nice disclaimer: I AM NOT TALKING ABOUT VEHICLE PURCHASES ADVERTISED AT 0% APR INTEREST. I can go into an entirely separate post about why that isnít actually a good deal for you to consider. I am, however, referring to 0% INTRO APR credit cards with reward/bonus points attached. These are commonly offered by big banks, and I have utilized these offers in the past.
The way it works: You get a NEW credit card (so obviously your personal credit needs to be solid enough to qualify). That new card is for new purchases/spending only. This replaces your existing cards with higher interest rates as your new method of paying for your everyday needs (gas, groceries, etc.). These cards tend to come with a 0% interest rate for a certain number of months, usually up to a year. They also often come with a BONUS reward if you spend a certain dollar amount in the first 60-90 days. This is literally free cash back to you if done right.
Now the question of how to handle the debt (old card and new). First of all, that 0% intro APR card may have a clause that is actually accruing interest if the entire balance is not paid when the intro term ends. READ CAREFULLY. If this is the case, you better be sure you have the funds to pay off this new card down the road. A Budget is crucial. And, this new card is for essentials, not to go shopping. If there isnít a balloon term on the end, and a regular APR kicks in later (reasonable, not 20%) then itís not the end of the world if you still have a balance when the 0% ends. Why? Because you should have been doing the following all along: Tackling the old credit card debt with the higher interest rate.
This takes a methodical, strategic approach to accomplish. In simple terms, you are better off finding a way to consolidate debt be refinancing or condensing multiple expensive lines into one with a lower interest rate. Most of us donít see just how expensive and harmful it can be to carry debt like that. A written financial plan is a good way to see just how harmful it is.
In another post, I will address the concepts of debts around bigger purchases (home, auto, student loans) because there is often a time and a place for it. My argument is not that all debt is bad (although I do say to avoid it if possible). My position is that expensive debt is bad, and should typically be the first area of opportunity to approach in your quest to improve your overall financial picture.