crediit counsellingCan Credit Cards be Cheaper Than a Line of Credit?

Sometimes people ask me how they can arrange an unsecured personal line of credit. (PLC) Their reasons for a PLC are usually along the lines of a lower interest rate, no annual fees, reasonable repayment conditions, and potentially higher limits.

These days it is actually pretty tough for a typical Canadian family to qualify for an unsecured personal line of credit.. It seems the banks will come up with far more reasons why they cannot give you a PLC rather than find a way to do it.

I can’t say I really blame the banks – prior to the recession their lending standards had been lowered in their zeal to attract new clients. Now, in addition to your credit score, they pay far more attention to factors like income and employment stability, how much available credit you already have, your personal net worth (including savings), and the amount of business you have with their institution.

But for those of you who have an excellent credit score, and a few decent credit cards, you have no doubt discovered there is cheaper money out there – cheaper than a PLC and just as easy to access.

Credit card issuers often send out special low interest rate offers to their best clients – those who pay off their balances in big healthy chunks, who have a perfect repayment history (never late, often early), and who in effect use their credit card like a “debit card with benefits”. Benefits can include reward programs, cash rebates, and of course building your credit rating – things you won’t get from a debit card.

These promotional rates are often between 1.99% and 4.99%, but for the past few years, some issuers have gone one step further. Zero percent, yes 0%, on balance transfers all the way up to the card limit.

And when the cardholder approaches the date when the offer expires to revert to normal interest rates, s/he may receive more checks with an even later expiry date. Some people receive these offers from more than one issuer.

This means some have been borrowing money from their credit cards for a year or more and paying no interest at all – now that is sweet, and sure beats the best personal lines of credit out there.

It’s not unusual for a normal credit card interest rate of 19.5%, so when you receive these offers from the card issuers, they are like gold.

Lorne Cutler left an excellent comment on this post at LinkedIn – I am reproducing the comment in it’s entirety below.

“While this technique can work well, there are a few basic rules that are not mentioned in the article. If you don’t follow these rules, you can easily end up paying 20 to 30% interest.

1) Never use the same credit card for purchases and cash advances. The low interest rate only applies to cash advances, not to purchases. If you only pay the minimum amount during the low interest period, and end up using the card for purchases, you will have to pay the card in full, or your purchases will not be considered as paid. Interest on outstanding balances for purchases will be at 20 to 30% and since your payment is now being split against cash advances and purchases, you will likely trigger the high rate on the cash advances as well as you can never pay the amount owing without paying off the card in full.

2) Always have a back-up plan. When the promotional rate ends, you need to be able to transfer the outstanding balance to another low cost form of financing or have the cash available to pay off the loan. Otherwise, the interest rate will flip to the normal rate and you will be paying 20 to 30%.

3) The cards with 0% interest often have an upfront administration fee of 1 to 2% of the balance borrowed. If you can borrow for a year at 0% but with an admin fee of 1%, the overall rate is 1%. If you only borrow for 3 months with an admin fee of 1%, you are actually borrowing at a rate of 4% p.a. That may not be such a good deal.

4) Watch dates carefully. If you don’t pay the card off in full on the end of the promotional date, you will flip to the higher rate.

While many people use these promotional rates to their advantage, the banks are hoping that you slip up so that they can get the higher rate ultimately.”

 

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Ross Taylor is a full-time credit specialist and mortgage agent who blogs frequently at ASKROSS

If you have any questions about anything financial, send him an email at info@dev.rosstaylor.org, he answers everyone

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