Tuesday, May 3, 2011

Low Interest Rate Credit Cards

A Credit Card is a debt instrument - like a car loan or a home mortgage.  Never forget that!  Eschew kickbacks like frequent flyer miles or  "cash back " in favor of the lowest interest rate possible.  Otherwise, if you ever carry a balance, you'll never pay it back!

At a cocktail party, people like to try to impress me with their faux financial acumen by telling me what a great deal they got on a credit card that gives them frequent flyer miles or "cash back bonuses".  These are people living in half-million dollar homes, making (or made) six-figure incomes, and they think the real important thing in their lives is getting $50 back from Discover or a $99 airline flight from Visa, after spending $50,000 on the credit card.

They are missing the larger picture.

When I ask them what the interest rate on the card is, they seem baffled.  They own this loaded pistol, and they keep it under their pillow at night, and yet they don't know if the safety is on or off.

As I noted before, there are three main "stats" you need to know on any credit card in your wallet - the interest rate, the Statement Closing date, and the Payment Due Date.  If you have a calendar program, program the last two into it. 

The folks who regale me with the tales of frequent flyer miles always say the same thing - "We just make sure we pay off the balance every month, and we don't have to pay any interest!"   Of course, they are neglecting to mention the $125 annual fee, but that seems like a small price to pay for a free $99 flight to Duluth, right?

Um, right.

And according to surveys, 70% of the American people claim they pay off the balance on their credit cards every month.  But according to the credit card companies, 70% of their cardholders carry a balance.  Clearly someone is lying - we are lying to ourselves.

The problem with this game is that it is akin to playing Russian Roulette.  If you ever - ever - find yourself in a situation where you can't "pay off the balance" for even one month, things snowball in a hurry.  The interest rates on cards like this - 25% or more - kick in, and suddenly, you owe hundreds a month, just in interest payments.  And if you are "behind the 8-ball", well, it is now a lot harder to ever pay off that debt.  For many people, it is the path to bankruptcy.

It is a high-wire act - charging up things on a high interest rate credit card and then paying off the balance.  When it goes well, then great.  If not - well, you fall to your death.  If you are trying to get from Point A to Point B, I think a better solution is to walk on the ground (debit card) or at least walk on a wire that is not so high (low interest rate credit card) than to walk a high wire just for the heck of it.

And again, it pays to set up auto-pay on your account, so the minimum balance is always paid - to prevent rate jacking, should you forget to make your payment.  And use online payment and check your balance weekly, if not daily.  Relying on the U.S. Postal Service to get Statements and deliver payments on time is a foolish risk - and yet many people do just that - waiting for a Statement to arrive to balance their credit card account and remind them to pay - and then rely on the mail to deliver their check on time.

One slip-up and you are rate-jacked!

So ignore the come-ons and gimmies for credit cards - they are trying to get you to play Russian Roulette in exchange for candy.  And it isn't a good bargain.

So how do you get a low interest rate credit card?  It ain't easy, and with new regulations in place, the card companies are getting desperate as they lose customers.  Instead of just offering us low rates, they are trying to stab us in the back as we go out the door.  Today, finding sub-10% rates isn't easy.  Just a few years ago, I had a Citibank card with a 5.9% rate, which is in mortgage territory.  I currently have a Capitol One card, which is 7.55%.

But Capitol One is now pushing "flyer miles" and rebates - on double-digit credit cards.

There are some low rate cards left, but many are switching to variable rates to hedge their bets over time - if interest rates explode, they don't want to be left holding the bag on a lot of low-interest debt.

There are a number of websites out there which claim to have good credit card offers.  But most of these aggregation sites are just collecting click-through revenue by selling you to the card company and collecting a finder's fee.  As you might imagine, as a result, you are not getting the lowest or best offers.  CreditKarma, CreditCards, Lowcards, and the other "come on" sites all have the same crappy offers - so-called "low rate" cards of 11-15%.  Or they tout "0% introductory rates" - that are good only for six months, until the regular high rates kick in.  There are no deals to be had there.

These sites are designed to victimize people who are in trouble with credit card debt and search online for "lowest interest rate credit card" - and not surprisingly, using keyword SPAMing, they make sure their sites are first, second, or third hits on Google.

This link on CNN appears to be about the same - lists of "low interest rate" cards that are nearly all over 10%.  What is really funny about that list (as well as the come-on sites) is that they list many cards in the 10-15% range first, and then list the lower rate cards later on, buried in the middle.

This article on CNN boils it down to one of their famous "LISTS"  - but most of the cards, other than the Simmons First card (which is logically the #1 choice) are "gimmick" cards, throwing pennies at you for dollars spent.  Getting 2 cents back on the dollar while risking 15% loan rates is a shaky proposition, in my book.  And unless you charge a LOT, you ain't getting much back.  And if you charge a LOT, you risk getting in a lot of trouble.  Catch-22.

Iberia Bank offers a cards with interest rates "as low as" 7.5% variable, which of course is based on your credit score.  Usually, you have to apply to get the card to find out what rate you will get.

Simmons First, an Arkansas bank, has cards with interest rates as low as 7.25% variable.  You have to have an excellent credit score (770+) to get one of these cards.  By the way, this otherwise obscure Arkansas bank has always had the lowest credit card rates, as I recall, even back in the 1980's and before.

My card with Capitol One expires later this year.  It will be interesting to see if they renew the agreement at the current interest rate.   I doubt it, as their current "best rate" is listed on their site as 10.9%  Citibank refused to renew their 5.9% card, but instead offered me 11.9% (no sale).  I closed the account, which had a zero balance.  So I may leave Capitol One at the end of the year, perhaps beforehand.

Credit cards, I am thankful to say, are becoming less and less important in my life.  And having played the credit card game - and seeing how you can get really badly burned - I am not sure I want to go back into it any time soon. They bait the trap with cash-back schemes and frequent flyer miles, but it never adds up to anything tangible (ask your friends with the frequent flyer card if they ever got anything out of it - you'd have to charge $50,000 or more to get even one flight!  The miles will expire long before you get there).

It is a tempting trap, but a trap nevertheless.  Credit cards are an inducement to spend - to spend more than you have - to literally live beyond your means.  And they are one reason our economy got into so much trouble in the last decade - when our savings rate went negative and people racked up debt and then rolled it over into home equity loans.

You can't spend your way to wealth.  You can't deduct your way to wealth.  And you can't "cash back" or "frequent flyer" your way to wealth.  Complex financial agreements almost always are not in your best interests.  Keep it simple, keep it manageable, keep your eye on the ball.

And that means a simple, no fee, low-interest, credit card - and just one of them, not a wallet full!

And it goes without saying - it means not carrying a balance, ever, even at low interest rates.