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Saving
0.37% for you, 18% for them
By Michael Chadwick
President, Chadwick Financial Advisors
This is the attitude that banks in America have. If you would like to keep your hard earned savings on deposit with them, they’ll gladly pay you .37% interest (maybe a bit more if you have a benevolent bank). If you would like to borrow some money in the form of a credit card loan, the interest rate will be 18% (+/-). These are averages of course; some cards are lower and others higher. Various other loans will allow lower rates – a personal loan has a lower rate than a credit card and a mortgage even lower. The point is that there is always a “spread.” The spread is what the bank earns minus what it pays. Be careful not to have too much money in liquid bank accounts where your money isn’t working for you – it’s working for someone else. Bank investments are a zero sum game and have been in all time periods with the exception of a brief time in the early 1980’s.
The high interest rates charged by credit cards are a non issue if you pay your balance in full each and every month. Credit cards can actually be a very useful financial tool if they have most or all of the following consumer advantages: grace period for purchases, no annual fee, and year end categorized statements and balance transfers treated as purchases. If you are disciplined, they are a very good tool. Betsy & I use a Discover card for all of our day to day purchases. Everything from gas, groceries and health care to toys, diapers and the occasional splurge for ourselves. Each year Discover gives us “cash back.” The bank isn’t really giving it; they are charging the merchants and forwarding it to us. Each November we get $300.00 - $400.00 to use towards holiday shopping.
During the course of the year, we used the banks money, interest free for between 30 – 60 days each month. This is exactly how you should behave if you use credit cards regularly. The banks are hoping you do not and you accrue balances, never pay them off and continue to pay interest. The banking industry is moving towards taking away some of the benefits of credit cards for consumers who know how to use them. The banks are beginning to shorten grace periods and raise fees hoping to punish those who misuse credit cards in the wallet. Many cards have instituted new annual fees (don’t carry a card if it has an annual fee) cut grace periods from 30 to 20 or 10 days (21 day average) and raised fees for exceeding credit lines or paying late. Be careful you don’t get suckered into these traps. The typical notice will be sent to you and printed in a size five font and you will likely discard it with the trash. How much of any document would you read with that size type?
If you cannot stay on the profitable side of credit cards, avoid them like the plague. Other viable alternative credit card options are using debit cards, paying cash or using the good old envelope system. They all work and are great alternatives if you tend to get in credit card trouble, paying interest to anyone other than yourself. 70% of the population isn’t careful with their cards and that’s why they are so profitable for the banks. Has a day gone by in the last ten years when you didn’t get a few credit card offers in the mail? You wouldn’t get them unless they were very, very profitable for the banking industry.
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