The credit game

Note:  This is not expert advice, as always with your money research it yourself, talk to those whom you trust, and get real advice before investing.  Risk is always a factor.

 

When I was young, my Dad gave me a real important piece of financial advice.  He said, “With money, there are two types of people, those who pay interest and never have enough, and those who make interest and always have some.”  Now he might not have said it just like that, and he was probably quoting somebody much smarter (smarter then my Dad?  Unlikely), but it stuck.  I always wanted to be one of those that makes interest.  So I’ve avoided debt like the plague.  One of my main reasons for joining the Navy was so that I could have money for college without having to work full time or take out those huge burden student loans.

 

But does that mean you shouldn’t get a credit card?  Hell no.  You just get them to pay you interest, and never return the favor.  First I’ll explain the rules, and then I’ll demonstrate on how this will MAKE you money:

  1. If you don’t already have one, get a free checking account from your local or branch bank.
  2. Setup a savings account at your bank as well, make sure there are no transaction fee’s and find one that is easy to transfer to and from, money market based savings account offer a good rate with relatively low risk.
  3. Setup automatic deposits from your place of employment into the savings account (Hassle free and the normally the quickest way to get your money)
  4. Find a a good credit card.  No monthly or annual fees, no finance fees, and 25+ day grace period (critical).  There are plenty, and with the way credit card companies operate these days ANYONE can get one of these cards (My friend Gabe just got an offer in the mail addressed to his dog).  It’s a bonus if you can get one that has some form of rewards program (I use a card that gives me United Frequent Flyer miles, but often the cards that give 1.5% or 2% cash back are better, depending on how much you fly).  I would recommend Wamu, you can get a card almost immediately online from them AND they offer free monthly tracking of your credit score (I’ll explain this later).
  5. This is key:  Setup automatic FULL payment for your credit card from your checking account.  Make sure you have enough money in the checking account to pay off your bills every month.
  6. Put everything that you normally buy on your credit card.
  7. STAY WITHIN YOUR LIMITS.  Don’t spend money that you don’t have, and don’t spend money that you “plan” on making.  The whole game falls apart if you can’t pay your bills.  One way to do this is to keep a purchase log, a running tally of how much money is in your checking account.  Verify this online (most banks have that option).
  8. When your credit card statement comes in, transfer the FULL balance from your savings account into the checking account (to get the most money value, future date this transfer to be made a few business days before your credit card automatically pays)
  9. Profit.
Here is how it works.  You work for the man.  The man puts $2000 in your savings account (a money market account at your bank, paying 2.5% APR).  You keep track of your spending during the month and put it all on your card.  The total spent is $2000.  30 days later, you get the credit card bill in the mail, you know from the last bill you got that the autopay is deducted from your checking around the 6th of the month (example) 20 days from today, so you hop online and setup an automatic transfer from your savings to your checking account 15 days from today to be safe.  The 6th rolls around and the money is pulled from your checking account, and your credit card balance is reduced to 0.  Congratulations, you just got the credit card company to give you an 45 day interest free loan.  Had you been paying directly with your debit card, the money would not have been in your savings account.  So you made 2.5% APR interest on $2000 for 45 days ($2000 * .025 APR * 1.5 months / 12 months per year = $6.25).  In our little example, you made only $6.25, maybe worth a few minutes of your time, but what if your card pays cashback? ($2000 * 1.5% cashback = $30), now your talking $36.25 for every $2000 spent monthly.  And that’s one month.  Assuming you can do this every month that’s $435 per year.  And the best part is, playing this game actually IMPROVES your credit (My score is currently at 802).
And here is the risk: YOU.  If you ever go beyond your means and miss a payment, almost all your gains are lost.  Credit cards normally have rates anywhere from 15-25% APR.  So lets assume in our example you don’t transfer the money from your savings account.  The credit card will try to autopay, and get nada, you will likely have to pay a fee (likely $150 or so), and you will also now have to pay all the back interest that they didn’t charge you that month for the credit card ($2000 * .20% APR = $400), so in one foul swoop you just cost yourself $500+ dollars, and likely negated all gains that you have made.
I’ve been playing this game since I was old enough to apply for my first Credit card, and I’ve racked up a pretty high score.  They keep increase my credit limit, despite the fact that I’ve never paid late, and therefore never paid them any money in regular interest, ever.  Who knows, maybe it’s some way to try to trap me into spending more then I can pay off, but they’ll never catch me 🙂
Kevin $$$$ / Credit Card Company 0
Edit – Thanks to those who found my little APR error, changes the math a bit.

6 thoughts on “The credit game”

  1. I agree with the idea of paying off your credit card bill each month whole heartedly, but your math is quite bit off when you talk about how much interest you will earn in your savings account each month. $2,000 sitting in a savings account at 2.5% APR will earn $50 over the course of a year (I’m using simple interest for the sake of simplicity). 45 days is roughly 12% of a year, so in that time you will only earn 12% of that $50, or about $6. You are right about the rewards amount, and that can really add up over time.

  2. They keep raising your limit because most people who have a higher limit spend more. Also, they make between 1% and 5% off of every purchase you make. That money comes out of the store’s pocket, not yours. It is their price to pay for accepting credit cards and increasing their potential customer base exponentially.

    I’ve been doing the same thing as you have with your bank accounts and credit cards for as long as i remember and it’s great. I have a high limit, i make the interest in my saving and money account every month and i have my cash back and points that buy me random appliances or airline tickets when i need them.

  3. your math is off.

    on $2000 principle 2.5% APR, would net you only $50 over the course of a year, not in the span of a month.

    the interest you make by leaving it savings is roughly $4

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