Gather Little by Little

Photo by: Graham Racher

I’m just an average man with an average life
I work from nine to five, hey, I pay the price
All I want is to be left alone in my average home
But why do I always feel like I’m in the twilight zone

– From “Somebody’s Watching Me” by Rockwell

Have you been shopping at a store lately and not been asked if you’d like to apply for a credit card and save 10%? How often do you receive credit card offers in the mail? How often do your kids receive credit card offers in the mail? How about convenience checks? I’m sure many of you can answer yes to at least one of these questions, I can answer yes to all of them. In addition, I receive mail almost weekly from Chase and Bank of America full of convenience checks that I can use “anywhere for low rate”. I really do feel like I’m in the credit card twilight zone sometimes.

No, it’s not paranoia, the credit card companies really are out to get us and they’re smart. Here’s just a few of the techniques they use and that unfortunately many people fall for:

10% savings for applying

This is a very common strategy employed by many different merchants who have their own branded credit cards. We shop at Target and get asked this question every single time “Would you like to apply for a Target card and save 10% today?”. This is the classic bait and hook strategy. They entice you with a 10% savings so they can get their plastic in your hands hoping you’ll use the card to purchase items in the future. Even better, they hope you won’t pay them off immediately. Rates on these cards can be very high, depending on your credit score.

I love Target, but I’m going to pick on their credit card program for a minute. A quick scan of the Target Redcard site showed APRs for a Target Visa ranging from 12.74% – 21.74%. When you apply you are first considered for a Target Visa, if you don’t qualify you will be automatically considered for a standard Target card which has a default APR of 23.74%. Any guesses on the percentage of people that don’t quality for the Target Visa? To be honest, I don’t, but my guess is it’s pretty high. One last thing, the 10% isn’t immediate. They mail you a 10% off coupon in the mail after you are approved.

Convenience Checks

Convenience checks are checks the card companies send you that allow you to write a check out either to yourself for cash or to others. They are generally used to transfer balances from another card or to get a cash advance in order to purchase a big ticket item. Convenience checks in most cases come with a promotional offer, for example 0% interest for 6-months.

When used to transfer balances, they can actually be a good deal under certain circumstances: 1) Your rate on another card is higher than the rate being offered 2) You fully understand the terms and conditions of the lower rate 3) You plan to pay off the debt before the promotional rate expires. The credit card company is hoping you’ll use these checks to move balances over from other cards. They are also hoping you don’t pay attention to the promotional rate expiration date, so they can begin charging you interest on the transferred balance.

Even better, they hope you’ll use the checks to get cash advances and purchase big ticket items. This is a win/win scenario for the credit card company the majority of the time. When you take out a cash advance, there is generally a transaction fee applied that is somewhere around 3-5% of the amount. The interest rate on the cash advance is also higher once the promotional rate runs out. So they are hoping you don’t pay it off within the promotional rate’s time frame. Some offers waive the transaction fee, some don’t, so make sure you always read the fine print.

My recommendation is, unless you are transferring a balance from another high rate card, just shred those convenience checks. They are just a temptation you don’t need. In any case, be diligent about reading and understanding the terms and conditions, expiration date, and what the rate will be after the promotional rate expires.

Introductory rates

Introductory rates as I’ve discussed a little already, are special rates offered to intice you to get a credit card with the company or to use your current account (see convenience checks above). As I’ve already mentioned, these can frequently be a really good deal and save you a great deal on interest when you move your debt from a higher rate card into a promotional rate.

I recommend transferring the balance, and cutting up the new card so you aren’t tempted to use it. Pay the balance off as quickly as you can and don’t miss or be late for a payment. Doing so can rather quickly bump you into a penalty rate which is often 25% APR or more. Based on first hand experience, this can really burn you.

6-months same as cash or 90 days same as cash

These are deals you will find at many retailers, and in particular furniture and electronics stores. Stores work with credit card and credit providers to offer you no interest deals when you buy large purchases like furniture and big screen TVs. These offers are a way of enticing you into buying something you can’t really afford.

When looking at these deals, it’s very easy to convince yourself that you can pay it off within the promotional time period. The credit companies are betting you don’t and their data shows most people don’t. When you don’t pay it off in time, they make the interest retroactive to the original date at a frequently very high interest rate.

I suggest avoiding these deals all together. If you don’t have the cash to pay for it, you don’t need it. Just say no.

Commercials

I’ve written about commercials before and I continue to be appalled at the techniques card companies use in their commercials to make you think credit is “cool” and that in order to live you have to use visa. They are using these commercials to brain wash you into thinking credit and debt are a normal part of life. They are trying to make you think that everyone uses credit cards, so you need to as well. Don’t be fooled.

One of the recent commercials I’ve seen that really annoys me is the Chase/Disney card commercial. You see a family going to Disney and having a wonderful time, paying the whole time using their Chase Disney Visa card. What they don’t show is the family coming home and 30 days later receiving a statement for thousands of dollars that in many cases they don’t have. I know this, because I was one of them once. Nothing puts a damper on the wonderful memories of a Disney vacation like a $5,000 credit card bill.

Final Thoughts – Gazelle Intensity

Don’t forget, the credit card companies are Cheetahs, constantly on the prowl for dinner (that would be you). Cheetahs are intense, hungry, focused, and fast…VERY fast. But, if you’ve ever watched a nature show, you’ll know that the Gazelle often gets away. They do this by knowing the weakness of the Cheetah…it can only run fast in a straight line. What the Gazelle has learned to do is zig, zag, bob, weave, and even run in circles until the Cheetah runs out of steam and gives up.

When you are faced with these various “Cheetah techniques”, act like a gazelle: Yell “CHEETAH” and begin zigging and zagging, bobbing and weaving. DAve Ramsey calls this Gazelle Intensity. This means shredding those credit card offers and checks, changing the channel to avoid those insane credit card commercials, voicing a quick “no!” to the cashier that asks you if you would like to save 10%, and exercise patience to avoid buying items you can’t afford.

Don’t be fooled. Credit Card companies have literally thousands of full-time people that do nothing buy try to figure out how to make money. While some of you will win or benefit financially, many don’t. Better to just yell “CHEETAH” and run. Full credit to the Cheetah and Gazelle analogy goes to Dave Ramsey.

What other credit card company “hooks” have you seen or experienced. Are you a Gazelle? Add a comment!