Saturday, August 23, 2008

moving a house note to a credit card

Sometimes you can get enough mailings of the credit card check offers to move a legitimate loan (i.e., for an appreciating asset, e.g., a house) to a place normally not legitimate, i.e., a credit card.

This one from Capital One is a good example.

To thank you for your loyalty as our customer, we’re offering you a special transfer rate. When you transfer balances to your Capital One® account, you’ll enjoy this great 6.99% APR to start with until July 29, 2009. And then your rate actually falls to an even lower fixed 4.99%.

More good news is that you won’t pay a penny of transaction fees with this offer. That’s right—no transaction fee with this offer.

Note that there is no transaction fee with most offers from Capital One. This makes an incredible deal, a refinancing without a refinancing fee.

As long as you make the minimum payment each month (and you should put this kind of payment on AUTOPAY, so you never miss it when you happen to be traveling, etc.), this loan is great. If your current car note or house note is at 7% or higher, you may want to consider this deal. You have to earn a good credit rating to get this kind of offer, and get your credit limit on the card up pretty high to make it worthwhile, but dropping 2% after one year (without refinance charges) is way cool!

transaction fees

Getting best deals from credit card checks. One of the important things that you can get with a credit card is a loan, by using the checks they send you from time to time. One way you test whether it's a good loan or not is by its initial cost, the transaction fee. Then you have to compare whether the initial cost and the APR together are less than other ways that you could get money.

Assume you are going to get a zero percent APR loan and your transaction fee is 3%. That 0% APR looks enticing, doesn't it? Did you know this is the same as getting a 6% APR loan with no transaction fee? Your zero percent APR just went to 6%. How?

Assume you borrow $1200.00 and you pay twelve payments of $100 each to pay off the zero percent loan. Your total finance charge is your 3% transaction fee times $1200, or $36.00.

Now, assume you pay 0% transaction fee and 3% APR. Each month you pay 0.03/12 times the current balance (dividing by 12 changes an APR to a monthly interest amount). You can put it into a spreadsheet and figure it to the penny, but let's assume your monthly payment is $100 plus the current interest. Your average balance for the year is one half the original amount, or $600. Multiplying the average balance by the APR gives the approximate interest for the entire year, $600 * 0.03 = $18.00.

When you paid a fee plus 0%, your total finance charge was $36. When you paid 3% APR, you paid $18. Which was the better deal?

Paying a percentage fee at the front of a loan effectively doubles the finance charge, assuming a one year payout.


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