Saturday, 21 February 2009

What credit cards can do

The other day I accessed this blog and just saw pitch black -- no text. Only the side panel remained. I must have left it idle for too long. Anyway...

When I saw "55 days interest-free" on my credit card (got it last year), I knew there was something profitable behind it. Other new terms for me were Cash Advance and Balance Transfer. I never knew you could do that with cards. But then again real life is a lot like board games: you learn the general rules first, play around for a bit, get the feel of it, and then, you go about asking, "Hey, what happens if I do this instead?"

My credit limit is less than $500. So when I first read about cash advances, I thought, what if I withdrew a few hundred dollars and put it in my savings? Then it would generate some extra interest. Which would mean income for me. It seemed like a good idea, but the banks' rules are such that there are no interest-free days on cash advances. Zero. Interest is calculated right from the day the cash is taken out. And then there's the 2% or so fee for getting cash you don't own. Would the savings account interest rate beat the cash advance interest rate? (It's actually an obvious giveaway, because the banks wouldn't want to lose...last time I checked, savings topped at about 5% p.a., while cash advances demand at least 20% p.a.)

So I thought about other ways of playing around with it. One thing I could do was use up all my credit to buy or pay for stuff, wait for a month plus till just before the payment due date, and then settle it in full. That way, I'd maximise the interest earned on my savings because the money still sits there in the bank. Like one website said, credit cards are a way of buying things now, and paying later. And with interest-free days, it's almost like the cards are giving you free money every month. This activity has even got its own name: stoozing. Using up $1,000 credit and stoozing in a 3.00% p.a. account would yield $2.50 per month. Think about it: you get to make money by using your card instead of cash. And I always thought that you'd be charged (vs paid) to borrow money. Of course you'd have to offset it against annual fees and and the like; now I appreciate the concession(s) that we students get.

And of course, this means nothing at all if you've got no savings account to generate interest in the first place. Maybe it's telling you to get one. Because the world as it now is runs on compounding interest--so make it work for you, not against you.


More: stoozing

2 comments:

Peta 'N' Ming said...

Okay.. honestly.. too accounting for me.. Would LOVE to hear you explain the whole thing to me.. hehehe..

[S]itie [B]Um [B]Um said...

saving is better than spending right??