I’m feeling so special. My bank sent me a letter, complete with “convenience checks” yesterday. Normally, I just send the the checks straight to the shredder, but one of the headings in this letter caught my eye. Here’s a part of the letter:
There’s never been a better time to use these checks
Take a vacation…transfer a higher-rate balance…purchase something you really need…even write yourself a check and deposit it into your checking account to use however you like. Whatever you decide, you’ll enjoy a 1.99% introductory APR on these checks through your September 2008 statement date.* After your introductory period, your rate will be variable — the Prime Rate plus 12.49%, currently just 19.99%.* With such a low rate, it pays to use the attached checks.
There’s so much wrong with this, I don’t even know where to begin. We’ll start with “Take a vacation”. Suppose I decide to take that vacation to Disneyland I talked about yesterday. The bank is offering me a credit line of $8500, so I’ll just write a check for the whole amount. I may as well do Disneyland in style right? Actually, come to think of it, as expensive as Disneyland is, I might be staying at Motel 6 for $8500. But that’s beside the point.
So now I have a charge of $8575 on my card (there was a $75 transaction fee for using the check). If I start paying $200 a month right away (which is what I’m paying toward my Citibank card right now), it will take me until January 2013 to pay off my trip to Disneyland. (I used this calculator to figure that out) And the interest? $3282! That’s a grand total of $11,857 for my trip to Disneyland!
But not only am I paying more than $3000 more than what I actually spent on my trip, I’m spreading the payments out over 5 years. That’s 5 years of $200 a month payments. $200 a month that’s now not available for things like rent, food, clothing….you know, the things we all need to survive. Suddenly, I’m more limited in what I can do with my paycheck every month. And there’s nothing I can do about it….for 5 years, unless I can come up with a way to pay more every month and get the debt out of the way sooner. That debt is like a ball and chain wrapped around my ankle.
Now let’s look at this another way. I still want to go to Disneyland, and I still have a budget of $8500. If I saved $200 a month, it would take me 3.5 years to save enough for the trip. But if I had a financial emergency one month, like maybe I need new tires for the car that I haven’t saved for, I could free up that $200 to pay for tires and push the trip back a month. I wouldn’t like it, but at least I’d have the flexibility to use the $200 a month as I please.
To sum it all up, if I want to take this trip, I can either finance it with my convenience checks , paying $200 a month for 5 years, for a grand total of $11,857,
OR
I could save $200 a month for 3.5 years, have total control over where my money goes, and pay a total of $8500.
Washington Mutual, I’m quite certain you’re wrong when you say, “with such a low rate, it pays to use the attached checks.” Because when I look at those figures, the one who’s doing the paying is ME. So thanks for the offer, but I’m going to send these checks through the shredder right away.
Have you ever used “convenience checks”? Have you ever been burned? Feel free to share your story in the comments.
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I’ve never really understood debt. I’m not sure that I’ll be able to save up for something, so instead I’ll pay the same amound of money for longer with dire consequences if I’m correct that I don’t always have the money available.
I guess I’ve been lucky enough to have always been hit with the realisation that you really do have to pay for it.
I ignore them – Don’t understand why every bank in the country is sending me invites. I will be so very glad when I am free of my own ball and chain!
LOL I’ve never had any credit cards, so I have no idea what it would be like to get checks in the mail for something like that! I definitely think that the shredder is the best place for them though!
The part that gets me is this: “currently just 19.99%.* With such a low rate, it pays to use the attached checks.”
With such a low rate…what a bunch of crooks! They pray on people who don’t know any better. Send to the shredder!
Oh yeah…and it does “pay”…them NOT you! Did I mention they were crooks?
Yeah, I about choked when I saw the low rate of 19.99% too. That’s when I decided I HAD to write this post. :)
Wow. I’ve seen those before…it’s horrible that someone might actually think those are just free money.
I used to be a convenience check writing fool. I got myself in over my head with credit card debt when my spouse was unemployed and I kept floating the balance back and forth between two of them (and racking up fees to boot). bah.
the little piece of my world from a bank that drives me crazy currently is my auto loan keeps sending letters offering to let me skip a payment. Um… yeah okay. read the fine print and of course that payment gets added onto the end of your loan, PLUS a transaction fee plus more accrued interest… yeah okay then.
How you describe debt as limiting what I can do now with my money – that is exactly how I feel about my student loans and why I need them – gone – gone – gone.
paidtwice – that’s horrible what your auto loan company tried to do! Credit cards….loans…..I hate them all! :)
Oh, yes. Convenience checks. I used them Back in the Day (a.k.a my first go-round at college). When I think about what I used them for, I want to kick myself.
Ready for it?
I bought groceries.
I should mention I used those for groceries when I had no reason; I had grants, a job, and cash coming in from my ‘rents.
I thought the ‘convenience’ was actually, you know, convenient.
Oh no! I did a lot of stupid things in college, too, though so I can’t judge. Like I opened a credit card account when I had no money and a minimum wage job. And then bought a new wardrobe…on credit.
I’m coming to the conclusion that college students and credit don’t mix well.
My credit card company started sending me convenience checks every month with my statement, and I put them through the shredder at once. Incidentally, I’m a college student, and I pay my bill in full every month and am careful to spend less than I earn.
Why did those of you who got into credit card debt in college do so? Did your parents discuss finances with you when you were growing up, or were you pretty much left to figure things out on your own when you left home?
@E.C. – It is so great to hear from a responsible college student! Keep up the great work!
I can’t speak for anyone else, but my mom taught me how to balance a checkbook the summer before I left for college, and my parents told me a credit card would be great to boost my credit, and that’s about all I knew about finances.
All of my friends were getting into credit card debt along with me, so I figured having a balance was OK, as long as I could afford the minimum payment.
I’m trying to do a much better job of training my children. And I don’t want to come off as sounding like I totally blame my parents either. I’ve made many stupid decisions about money & credit along the way, and I take full responsibility for those decisions.
Thanks for weighing in E.C. It’s nice to hear from a younger person who’s starting off the right way! Keep up the good money management!
Tha amazing part is that people are obviously using these “convenient” checks or they would not spend the money to print them and send them out. Several years ago I actually considered using them, I was in bad financial shape at the time. The scary part is the people that will use them are probably already in bad debt.
Oh by the way Lynnae, also thanks for the mention in your Carnivals recap post! :-)
Or you could just take the $8,425 check ( +$75 trasaction fee for a total of $8,500 credit limit), put $7,000 in a 6 month CD, $1,450 in a high yield savings and withdraw from that every month to pay the $200 monthly payment and when the CD matures just put the $7,000 into high yield savings for another two months and pay everything back before the 1.99% APR expires.
Let’s do the math with the following assumptions:
1) Interest on this cash advance is 1.99% for 8 months.
2) You can lock in a 6 month CD at 5.25% APY
3) You can get a high yield savings at 4.8% APY
4) You will make $200 payments every month towards the credit card every month.
5) You will pay off the credit card debt after 8 months before the interest jumps to 19.99%
6) You pay 25% tax on interest.
With the above assumption you could make $60 in 8 months on the money. Granted it’s not much but you can play the same game with $50,000+ credit limit and 0% promotional rate for a year for a lot more lucrative benefit.
You tell them, Lynnae.
The banks are dangerously seductive.
Woe betide those who fall for these methods, without any serious thought and analysis.
@Greg T. – No way, no how! I know some people have been successful at credit card arbitrage, but I think that’s a dangerous game. It’s definitely not for me!
Lynnae,
I’m doing $150k at 0% right now. About half of it for 8 months and the rest for 12-15 months…. If you use Quicken and due diligience it’s completely safe. I’m expecting an return in the $3,000 range this year after taxes……
@Greg T. – It’s the due diligence part I’d worry about. I’m not the most organized person in the world. I’m working on it, but I have a ways to go. Plus I’d worry about the credit card companies moving due dates around on me. That happened recently, and I got burned, even though I thought I was being a responsible consumer.
When I open a new credit card, I call them as soon as the card arrives (usually you have to call to activate), and tell them I’d like to opt out of all the mailings (convenience checks, all that “protection” stuff, etc). Then I don’t have to deal with the madness, and the waste of paper.
@deepali – Great idea! Wish I would have thought of that! I’ll call and cancel all of the “extra” stuff right away!
@Greg T. I personally don’t fault people for making money with credit card arbitrage, but like others have stated here, I don’t think I’m organized enough to make it work. But I do have a question. Do you guys who do it make arrangements to have the debt paid off (automatic transfer when promotional rate runs out, for instance?) in case you kick the bucket so you don’t burden someone else with all that debt?
@ Chuck: I’m currently running a $220k credit card arbitrage. I don’t have it set up automatically to pay off at the end of the promo, but that’s because I usually transfer it off to another card with another 0% promo. I have been working on putting together a list of ‘what to do if I die’ for my family:)
Have you ever succeeded in getting a credit card issuer–or the issuer of a home equity loan or a line of credit!–to STOP sending those darn blank checks? After months of repeatedly trying out “opt out” with one lender, I had to threaten to complain to the federal banking commission to get them to quit it.
Anyone can steal those things out of your mailbox and run up a nice debt against your line of credit. Then you get stuck with the debt and with the interest on it. Or with a gigantic hassle to get out of the mess.