9 Ways to Avoid the Perils of Credit Card Teaser Rate Loans!
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When I got separated in early 2006 and then divorced in July 2007, money was Extremely Tight.
In addition to maintaining two households and paying big legal fees, I was underemployed or unemployed.
I had a high credit rating so a number of credit card companies offered me Teaser Rate loans.
A couple of loans carried a 0% interest rate, yes zero percent. And two or three other loans were at 2.99% and 3.99%.
Super low as compared to the typical 18% to 21% interest rates per year.
Highway robbery by many standards!
Going into the Great Financial Crisis in 2007-2008, I was self-employed, doing various consulting assignments and projects.
Well, wouldn’t you know it – one of my clients ran out of money and didn’t pay me!
OUCH!
That led to financial distress and then collapse.
Somehow, I missed the payment due date for one or two of the loans with the teaser rates.
BAD MOVE!
I don’t know if you have faced this, but the credit card company jacked up the interest rate to something like 24% – Back to the Date I Took Out the Loan.
That meant I had to pay the super-high 24% interest rate from Day One. And the interest bill kept mounting until I paid off the loan in full.
While that was costly, it hit me in the head that I fouled this up.
Truth be told, I knew better.
I thought I could beat the odds.
NOPE!
Here are 9 ways you can avoid this mess:
Create a personal budget.
In particular, you should come up with an amount of money you can comfortably spend on discretionary expenses based on your income and the money you have left over after you cover your necessary living expenses. Discretionary expenses include coffee at Starbucks, dining out at restaurants, vacations, and so on.
2. Follow your personal budget. Arrange your activities and spending to fit within your budget. But be flexible.
3. Monitor your spending and compare your actual spending to your budget.
When you spend more than your budget, cut back.
When you enjoy a delicious dinner at your favorite fancy restaurant and the cost exceeds your regular, ongoing discretionary spending amount (budget), cut back!
Stop spending other than necessities. Average out. Get back on track.
4. Continuously look for ways to spend less! Continuously look for ways to reduce the cost of your necessary expenses.
5. Defer unnecessary expenses. Defer discretionary expenses and major purchases until you can save up. Or wait until you receive your annual bonus.
6. Work overtime to earn more money, although less appealing than spending. At least I think so! HA.
7. Save money in advance for big purchases.
When I was a teenager, the banks offered “Christmas Club Accounts” where a customer opened a special account and made monthly deposits to accumulate enough money to cover the Christmas gifts and repast. Worked like a charm. I use the concept today!
8. Work overtime
However, deferring and reducing discretionary expenses and looking for ways to cut your necessary expenses is typically much easier than working more hours.
9. Look for vendors that offer ‘interest-free installments’. Think of ‘Buy Now Pay Later’ programs.
Five years ago, I purchased a new bed from Mattress Firm. They had teamed up with a consumer finance company and offered 36-month, zero interest financing – 0%. An interest-free loan (sort of).
I had saved up the money to purchase the bed and pay in full upon purchase. But the salesman told me that the retail price was the price – in other words, no discounts – regardless of whether I paid in full with my credit card or made installment payments. So I took out the loan.
He probably received a commission on the sale from the lender.
Anyway, it was not lost on me that the cost of the interest was part of the purchase price. . .
I set up automatic payments to make sure I paid each monthly installment payment on time. Schedule your payments for three or four days before the payment due date.
10. Think twice before borrowing on credit cards.
11. Instead of using high-cost credit card debt for spending or big-ticket purchases, ‘borrow from yourself’ and use your savings to repay yourself.
Then pay yourself back every month, with interest.
12. Borrow from friends and family?
This option may be a good one for you. But it often comes with a price.
I have seen people fail to repay their loans. Resentment built up. Holiday dinners became tense.
Please note that I am Not a fan of borrowing money from your retirement accounts – 401(k) plan or 403(b) plan. But sometimes, we might have to borrow from our retirement plan. One need is to cover unexpected, major medical expenses.
13. When you take out a credit card teaser loan, be very careful.
Be sure to read the fine print. All of it.
Follow the rules!
14. Set up automatic payments so you ensure that you pay the required payment – payment due or minimum payment – automatically!
This way you won’t impair your credit rating or default on your loan and trigger the super-high interest rate and costly interest expense.
Make sure there’s always enough cash (“good funds”) in your checking account or savings account to fund the automatic payment; otherwise you’ll be in hot water!
In recent years, many banks have raised their checking account fees.
Although I’m not a big fan of maintaining lots of bank accounts, you could open another checking account or savings account for the sole purpose of funding automatic payments. Then, make sure you have an adequate account balance so you cover the payments.
15. Once you have an outstanding balance on your credit cards – that means you are borrowing from your credit card company. And you forfeit the grace period so you are paying interest on your entire outstanding balance.
I know you know this but I want you to focus on the fact that you are incurring high-cost interest expense.
And this will easily kill your financial plan and prevent you from building wealth.
If you have outstanding credit card debt, pay it down ASAP, starting with the highest interest rate first.
We’ll be covering these topics and more in future Budget and Grow Rich® blog posts.
Fortunately, a few years after my divorce I got a steady job with healthcare benefits and turned things around. I was able to repay my debts. Now, back in solid, sound financial shape! Proud of it.
And you can too!
Be smart out there.
See you next week.
Arthur V.
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