Saturday, October 8, 2011

Capital One Comes Through - for existing customers

Capital One has been pushing rewards cards lately - as well as cards with lousy interest rates - variable and in the double-digits.  But if you have an older, low-interest rate card, it pays to hang onto it.

While traveling through Canada, we made extensive use of our Capital One Master Cards.  Why?  Because Capital One is one of the few Credit Card companies that doesn't charge currency conversion fees.  These fees can top 3% or more at some banks (such as BoA) and even as high as 8% in some instances (!!!).  Capital One charges zero.  Bubkis.  Nothing.

However, I was concerned about the interest rates on the new Capital One cards.  My existing card is at a low 7.15% rate.  When it comes to credit cards - which are a debt instrument, period - the lowest interest rate trumps everything - cash back, flyer miles, or whatever.  One month's interest at 22% can wipe out a year's frequent flyer miles in a real hurry.  And if you end up in financial trouble, high interest-rate "rewards" cards are an express-train to bankruptcy court.

Current Rates for Capital One are all in the double-digits - and often variable.   These are not very good rates, and the come-on of flyer miles is simply not worth the risk of onerous, intractable credit card debt, over the long term.  Lower rates are available from other banks, such as Simmons First.

I had left Citibank over this issue.  I had an astoundingly low 5.55% rate card (with a $20,000 limit no less, enough to buy a car, at a rate lower than many car loans!) which I used for business, to pay Patent Office fees.  However, Citibank felt that this was too sweet a deal, even though they collected 2-5% on each transaction I made (in the tens of thousands of dollars a year).  So when the card expired, they announced that the new card, if I wanted it, would have a rate of 10% or more.

I politely declined.

Capital One had a slightly higher rate, at 7.15%, but still very competitive in this day and age.  My concern was, when the card expired at the end of this month, they would sock me with the new, higher rates.  Their best rate, right now, is over 10%, and that is for someone with an excellent credit score.  And even then, it is a variable rate.  Why credit card companies are pushing high rates in a time of low interest is an interesting question - other than the obvious answer that they have to clean up a lot of credit messes cause by their own malfeasance, and thus need the money.

But, for some reason, when my current card expired, they decided to continue the card at the current rate.  So I will keep the card, at least for now.  The lack of currency conversion fees AND a low interest rate, make for a card that will come in handy if, for example, I decide to take a cruise on the Rhine....

Unfortunately, these low rates do not appear to be available for new customers.  So I cannot recommend Capital One as a credit card to have.

High interest rates are simply too dangerous to play with.  It is like juggling chainsaws or playing with dynamite.  You may think you know what you are doing, but one mis-step, and it is all over.  And few of us actually know what we are doing, financially, half the time.

A better approach is to not play with fire at all.  If you don't play with fire, you will never get burned.  And if you don't have a high interest rate credit card, you will never find yourself behind the 8-ball with $20,000 in debt and no realistic way to pay it off.  And this happens, all the time, in the USA, and usually to the people who say, "Well, I just pay off the balance every month, because I have the self-control to control my spending".

It is a nice fiction.  But few of us have that sort of control.  It is akin to going to a casino and saying you won't gamble.  Or go to a strip club and not stare at the nice jigglies.  You don't have that level of self-control, and the credit card companies bank on this.

I hope that Capital One gets back into the low-interest-rate game and that Credit Card companies in general go back to fixed rates, instead of these variable rates.  Perhaps they are afraid to lock themselves into such rates at the present time, as they are concerned about new regulations that may limit their profits.

But I have a suggestion for them that might help.  Instead of offering 25% interest rate credit cards to insolvent people who will never pay you back - and then losing tons of money in the process - how about offering good rates to people with good credit?  Just a thought.  If you cut back on the fraud and bad debt (instead of looking at it as a the cost of doing business) you might - just might - find a profitable model there.  You know, like businesses used to do, 40 years ago.

But hey, that's just me being crazy again.