Wednesday, July 8, 2009

Betting against the credit card company

The rich ruleth over the poor, and the borrower is servant to the lender.   Proverbs 22:7

We have some friends who had a goal - and it was a very good goal. It would cost a lot of money, but it was the type of expense that results in an equal size tax credit, meaning that they would get all of the money back during the next tax season.

They were able to find a credit card that offered 0% interest for one year, followed by terrible interest. They put most of the debt on the credit card, knowing that they would be able to pay it off before then, with their tax refund.

Let's pause for a moment here, and ask a simple question: Are credit card companies generous? Did they give my friends this card just to help them out? Certainly not. The company gave them this card because they knew that, statistically, a high enough percentage of people would fail to pay off the card after one year to make up the losses on all of the people who did pay it off after one year.

Basically, trying these sorts of tricks are like betting against the credit card companies.

Our friends ran into a problem with this expense - and because of the intricacies of tax law, they would not be able to put the tax credit on the current year's return. They would have to wait until the next year. They suddenly had a looming deadline to pay off the credit card, and no money with which to do it.

Credit card companies are devious. Hence, my rule:
  • If you don't pay off your credit card in full every single month, just cut it up.
A minor variation on this rule was discussed in the Ensign:

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