Meandering Musings

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Credit Card Hacking

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Credit card hacking is the name given to take advantage - that solely benefits you - of the offers that credit card companies(CCC) put out because the competition is fierce. Credit cards are a one-way street. If you use it in a way that benefits the bank, you are not really gaining any real financial benefit. Few things in life are a zero-sum game but using credit cards most definitely is a zero-sum game.

For example, let’s say a CCC offers 20 months of 0% interest, plus no other fees, on both new purchases and existing balances on other cards. You have $5000 or so on a different card that you are paying interest on. You could transfer the balance, pay it off over the 20 months at $250 which might be more than the minimum payment you have been paying but you will save a lot of money.

Alternatively, instead of a home improvement loan which is much cheaper than most credit cards you put $5000 on your 0% interest card for new flooring or whatever. If $250 is too steep, there will likely be more cards offering 0% on transfers with a 1-3% transfer fee, which is still much less than paying interest each month.

CCC’s also offer other things like extra flyer miles or points and sometimes cash as a credit statement. The best I have seen is $500 on $2000 on new purchases in the first three months, as a statement credit which would leave you only $1500 to pay off or if you do this the right way and never carry a balance on credit cards that charge interest, a nice $500 to spend as you see fit and you never paid a penny of interest.

These companies rely on American consumers' ignorance and what they really hate is well informed and disciplined customers. Taking advantage of this in a way that only benefits you is not illegal nor is it unethical. You are simply taking them up on their offer, while they hope you also pay a ton of interest but that is not required nor is it good for you.

Sure, if everyone used credit cards like this they would stop making these offers but what are the odds that a sizable number of people would do this? That will never happen but a savvy person can use them to generate a lot of money and other benefits every year.

I just wish I could use a credit card to make my mortgage payment, I could take a vacation or two a year for very little out of pocket and pay no interest to the CCC because the second the payment posted on the credit card I would pay it off. CCC’s as you likely know, take a percentage out of the purchase price, so banks don’t allow payments to be made that way.

Mr. Money Moustache

I first explicitly heard about credit card hacking from Mr. Money Moustache, who has a great website devoted to all things about financial freedom and retiring early. Nothing about credit card hacking or anything else he talks about is esoteric, it is generally obvious things stated very plainly and it just requires discipline and some planning.

His advice is straightforward and backed by mathematics, not by feelings like some advisors do. Paying off a home loan @ 4% early may feel good but you lose money when you consider you could have put the extra money in an index fund that averages 8%. His advice basically amounts to stay out of debt, live inexpensively - not cheaply, which is a big difference - and build your total balance in several index funds as fast as you can until you can live off a portion of the interest payments, putting the rest right back in to continue to build your wealth. I believe he also dabbles in real estate a little but that is just a side gig. If I remember right, it took him about 10 years to retire and it has been close to 10 years since he retired and is significantly wealthier today than when he retired and seems to have a lot of fun. He takes several vacations a year, works on projects that interest him and whatnot. It is total freedom and you really don’t need a huge income to do this.

He is very transparent about his income and spending habits and will post spreadsheets covering his yearly expenses and taxes and it is shockingly low. He does own a nice home outright which must be so nice. He is a great writer and has so much wonderful information. I could not recommend his site more.

Personally, I wish I could work for 5 more years in my field, that would be anywhere from $80k to $110k, after taxes, that I could dump into index funds every year since I already have a steady income that pays all of my expenses and then some. That would build up savings quickly that I can just keep putting the interest back into it and just use some of it for one nice vacation a year and on an occasional home upgrade. Oh well, life does not always cooperate with even the best-laid plans.

Let’s get back to credit card management.

First things first

This will not be beneficial at all if you carry balances, which the exception is a 0% card and even then you could put the money you save on interest into an interest-bearing account. So the first order of business is to get out of bad debt.

Pay down all revolving debt as fast as you can, unless you are beyond a master investor or impossibly lucky there is simply no way to make more money than the interest you are paying on these cards. There are many financial calculators online to help you make out a plan of attack. There are also Excel macros for these calculators you can download if doing the math on your own seems daunting.

Closing the accounts so you can not make further purchases is a good idea.

If you have a car payment, paying that off quickly would probably be a good idea, unless it is a 0% loan or close to it. If it is 0%, making the payment normally could help you have more money to invest.

If you have student loan debt, and you can get rid of it, do so. If you are thinking of going to college, do not take out student loans, it will be an albatross around your neck for 10 years or more. Use Pell grants, apply for the student work program, apply for scholarship programs and there are many. I had many students that I had to fill out progress reports on for various private foundations that offered scholarships. This was great since few of them could have attended school unless going into massive debt. Search around, ask your school’s financial aid office and pray the US joins the first world and stops making higher education so expensive.

At the very least pay off all of your high-interest accounts, even if paying down the car and student loans are not feasible, you will at least be in a good position to move your financial situation forward.

Get your credit in order, if you do have a lot of revolving debt, your rating may not be as high as it could be. That is not always true as things like debt/income or debt/balance are important to your credit card rating. Many of these offers require good credit, at least 680 FICO score, and many are higher than that.

If you are hopelessly behind, there are good solutions to get out from under it. Unfortunately, the government made it more difficult to bail out using the bankruptcy laws. It is a depressing thought but if you do not gain and keep financial control you will never get ahead. Talk to a bankruptcy lawyer, many will give you the first visit free and can lay out your options very succinctly. Call your credit card companies to make arrangements, they might be more willing to cut down your debt in exchange for paying a little more over a shorter time and write off the rest, for example. There are credit counseling agencies, some are quite bad for you, that can negotiate for you. As always ask a lot of questions and do the math before committing and remember the most important economic principle: opportunity cost. This means to run the numbers for other options and make an informed decision based on some simple calculations.

During this phase, think of it as detoxing and learning to control spending. You will need it so you can get ahead.

Now you can get started

First rule: Never buy anything on these cards that you would not normally buy and don’t really need and then pay it off immediately. Find out the date that interest compounds and make sure your balance is $0 on that date. That will allow you to carry a balance until payday but remember, these are everyday purchases.

Second rule: Before using a card make sure it is the best option for you for making the purchase.

The generally recommended way to do this is to shop around for the best deals. There are lots of websites that review offers to help you out, I like nerd wallet but there are many others. They will give a rundown on the offer, the terms and give a ballpark for the minimum credit rating required and a recommendation. When an offer runs out, switch to other cards and rinse and repeat. That makes it something you need to manage so keeping it simple for those of us that are simple is important.

There are lots of different offers and ways to look at it. For myself, I keep one constant card and switch others out as needed and I don’t use more than two at a time to keep things manageable. If you are lucky and have a functional brain, having three or four might be optimal.

My constant is the Amazon Visa administered through Chase. I buy there often and the 5% back on purchases at Amazon if you have a Prime account and 3% otherwise - and I am pretty sure Whole Foods - that you can use for future purchases, a statement credit or cash deposited in a checking account. Yes, Prime costs extra which eats at your money back, my phone service gives me free Prime so it is not something I think about.

It also offers 1%-3% back on purchases outside Amazon. Amazon sometimes offers 10%-20% back on specific items at Amazon and on Chase’s website, they have offers at specific stores and restaurants that you can take advantage of, usually 5%-15%.

Amazon also offers a built-in zero interest offer on many items on their website. They just divide the purchase price by 6, 12, or 18 and add that to your minimum payment. It is a better option instead of those awful “rent to own” stores.

It is a good card to look into. I would not go as far as recommend it. I have difficulty openly advertising any company, much less a bank.

Amazon also offers a “store card”, good only at Amazon which is managed by Synchrony Bank. It has similar features but it is not a credit card. It has no fees but does have higher interest rates but that doesn’t matter if you don’t carry a balance and it is a great way to build up some credit if you are starting out or have damaged your rating.

Try to match your buying habits with the card and never ever use a card to dictate your buying habits.

Stick to your budget and pay for everything with these cards and never carry a balance. That sounds easy but it is not as easy for most of us.

Used properly, not only can you make some extra money and gain benefits effectively for free it is great to gain discipline and sharpen analytical skills.

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