Thursday, December 18, 2008
Battening Down the Hatches vis-a-vis Credit Cards
I have been telling Free Advice readers for months that the conventional old school wisdom is not necessarily correct in the present environment. Yes yes, you should cut your spending and save, but this doesn't mean you should pay down your credit card balances.
However, there is a point of clarification that is in order. The rationale for my advice is that if and when prices go through the roof (and again, see my favorite chart below--which I often reproduce because some outside readers stumble upon an individual post through a Google search, not because they are my fans), you don't want to hold all of your savings in the form of diminished dollar debt. On the contrary, your student loan debt, mortgage, car loan, etc., will all become smaller burdens if prices go up by 50% and (say) your paycheck goes up by 40%.
BUT, be careful. If you have huge balances on your credit cards, where the rate adjusts based on some formula involving the prime rate, then you could be screwed. You don't want to get caught with $20,000 in credit card balances that roll over month to month at 43.9% APR. (You don't want to have an ARM on your house, either.)
So what I just did was a balance transfer onto a Discover card at 3.99% locked in to November 2012. In a sense, it's my way of ensuring I'm near the front of the line with all these new dollars Bernanke is handing out. Let it rain, Ben!
(Once more giving the lie to the alleged "credit crunch," they gave me a $15,000 credit line based on my verbal statements of income, and of course on my credit history. The tightwads said if I wanted more, I'd have to provide them with documentation of my income. Oh the horrors! Where's Steinbeck?)
In conclusion, I am saying that if you've got a bunch of disposable income you've freed up by cutting your spending (and good for you if you've got that discipline), I think it makes more sense for you to buy some physical gold and silver coins first, rather than paying off fixed-rate dollar-denominated debt.*
* If we have deflation for the next three years, then obviously this is some horrible advice.
However, there is a point of clarification that is in order. The rationale for my advice is that if and when prices go through the roof (and again, see my favorite chart below--which I often reproduce because some outside readers stumble upon an individual post through a Google search, not because they are my fans), you don't want to hold all of your savings in the form of diminished dollar debt. On the contrary, your student loan debt, mortgage, car loan, etc., will all become smaller burdens if prices go up by 50% and (say) your paycheck goes up by 40%.
BUT, be careful. If you have huge balances on your credit cards, where the rate adjusts based on some formula involving the prime rate, then you could be screwed. You don't want to get caught with $20,000 in credit card balances that roll over month to month at 43.9% APR. (You don't want to have an ARM on your house, either.)
So what I just did was a balance transfer onto a Discover card at 3.99% locked in to November 2012. In a sense, it's my way of ensuring I'm near the front of the line with all these new dollars Bernanke is handing out. Let it rain, Ben!
(Once more giving the lie to the alleged "credit crunch," they gave me a $15,000 credit line based on my verbal statements of income, and of course on my credit history. The tightwads said if I wanted more, I'd have to provide them with documentation of my income. Oh the horrors! Where's Steinbeck?)
In conclusion, I am saying that if you've got a bunch of disposable income you've freed up by cutting your spending (and good for you if you've got that discipline), I think it makes more sense for you to buy some physical gold and silver coins first, rather than paying off fixed-rate dollar-denominated debt.*
* If we have deflation for the next three years, then obviously this is some horrible advice.
Comments:
Why bother with the 3.99% Discover Card, when there are plenty of 0% offers. I understand that the 0% offers don't run through 2012, but you could just get new 12-month cards every 12 months...and use the Discover Card as a backup plan if the 0% cards dry up.
Do you think there is a big advantage to buying physical gold/silver over buying "paper" gold/silver(like a kitco pool account)? Do you think significant risk that the government could seize these accounts? It's just hard to shell out 20-30% over spot to get coins, when you can get it for spot in a pool account. Plus you don't have to worry about storing or redeeming it.
Russell,
The Discover card offer didn't last forever. If I waited for interest rates to go up to 25%, I doubt they'd still give me the offer. So I wanted to lock in a rate now.
Also, I haven't been getting 0% offers in the mail recently. I stopped getting those a few months ago.
The Discover card offer didn't last forever. If I waited for interest rates to go up to 25%, I doubt they'd still give me the offer. So I wanted to lock in a rate now.
Also, I haven't been getting 0% offers in the mail recently. I stopped getting those a few months ago.
Bryan,
Either government seizing them, or it turns out that the funds don't really have gold backing them up. I am not knocking the Kitco fund, and maybe they are legit. But just in general, if I'm holding a bunch of precious metals out of fear of large inflation, I feel better if it's in my physical possession.
I didn't pay such a high premium for my silver coins (which were just old US quarters). And I haven't done it myself, but the ads I hear on Rush Limbaugh say they sell gold at spot?
Either government seizing them, or it turns out that the funds don't really have gold backing them up. I am not knocking the Kitco fund, and maybe they are legit. But just in general, if I'm holding a bunch of precious metals out of fear of large inflation, I feel better if it's in my physical possession.
I didn't pay such a high premium for my silver coins (which were just old US quarters). And I haven't done it myself, but the ads I hear on Rush Limbaugh say they sell gold at spot?
What's so hard about buying physical gold? Walk into a bank, buy some bullion, put it into a safety deposit box.
Buying paper gold makes no sense to me if you really believe the worst-case-scenario is likely. After all, it's not meant to be an investment, but a security.
If, on the other hand, you are trying to simply play the market, then you are doing nothing different from a stock-market day trader.
The difference between paper gold and bullion is probably the same as between time-share and real estate.
Oh, and I don't fully get the silver coin thing: silver is an industrial metal more than anything else. But, I may be wrong on that one. I just believe in gold more than silver - if only because gold does not react with oxygen;)
Cheers
Buying paper gold makes no sense to me if you really believe the worst-case-scenario is likely. After all, it's not meant to be an investment, but a security.
If, on the other hand, you are trying to simply play the market, then you are doing nothing different from a stock-market day trader.
The difference between paper gold and bullion is probably the same as between time-share and real estate.
Oh, and I don't fully get the silver coin thing: silver is an industrial metal more than anything else. But, I may be wrong on that one. I just believe in gold more than silver - if only because gold does not react with oxygen;)
Cheers
James:
I'm fairly new to all this. Do most banks actually have bullion to sell? I've only been looking at coin shops, ebay, and online stores. Most of these places seem to have a fairly hefty markup, especially if you want to buy smaller denominations.
I think I understand the benefits of silver coins over gold. If we are talking worst case scenario, the dollar fails, and you want to use your metal as a media of exchange. It would be easier if you had a stock of coins valued at 10USD than if you had a few coins worth 1000USD each.
I'm fairly new to all this. Do most banks actually have bullion to sell? I've only been looking at coin shops, ebay, and online stores. Most of these places seem to have a fairly hefty markup, especially if you want to buy smaller denominations.
I think I understand the benefits of silver coins over gold. If we are talking worst case scenario, the dollar fails, and you want to use your metal as a media of exchange. It would be easier if you had a stock of coins valued at 10USD than if you had a few coins worth 1000USD each.
I just got a 0% Capital One offer last month...good for 12 months. I needed it too because my wife paid our Discover Card late one month and they jacked the rate up onver 20%.
Bryan, I can't talk about banks in general, but my home-bank had them until recently (about two months ago), when I bought them. They had them last month when I asked about them, but foolishly did not buy.
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