I had to go back to see why I missed this Wall Street Journal story. It was published March 11. Turns out that I was working on a paper that was due the following day, which explains why it slipped through my net. However, none of my readers sent it to me either. Given how controversial this column must have been, I'm surprised I didn't receive several emails about it. No matter. I doubt that Brett Arends has changed his position since last month. Brett, it turns out, believes that it may make sense to build an emergency fund by borrowing against a credit card. And he's not talking about borrowing at 0% either.
From Brett's story (hat tip Liz Weston):Usually the sensible financial advice is to pay off your credit cards. It's expensive debt. But people without enough on hand right now may find it makes sense to borrow from their credit cards and put that money in a bank account. Sure they will pay a negative spread, borrowing at 12% and earning 1%. But they may figure that is the price of being prepared.
The added incentive: Card debt is unsecured. So in a worst-case scenario, credit-card debts are often discharged in bankruptcy court even while some assets, like retirement plans and in many cases your home, may be protected from creditors.
I'm certainly not encouraging this strategy for anyone who can avoid it. It's not pretty. But who said anything about the current situation is pretty?
This isn't the kind of story I expect from the Wall Street Journal. Brett talks about a negative spread -- borrowing at 12% while earning 1% -- but I'm still trying to figure out where Brett is going to find credit-card cash that only costs 12%. Most cash advances, if you're not getting some promo rate of 0%-5%, is going to cost you north of 20%.
Desperate times call for desperate measures. But can anyone defend Brett's position? If you can, please weigh in.
Read the rest of the story here.
Thursday, April 23, 2009
Emergency Fund Math
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26 comments:
If you know are you going to default, it's not much different than robbing the bank. However, if do not know that you are going to default and your emergency fund is lacking, plopping a large BT into your checking can help make minimums on a lot of balances for a long time and possibly get you through to the next job.
I personally would rather have no balances.
Right. If you KNOW you're going to default, that's a very questionable tactic. It would be akin to robbing the bank (my opinion).
I'd rather have no balances, too, Athens, but assuming you do, you're saying you could advocate this for a minority of people?
You don't get a cash advance, per se. If you have a Capital One card, chances are they send you lots and lots and lots of checks, most of which there is NO fee. Write a check to yourself, deposit it in your bank account. When it hits your Capital One account, use another bank credit card's check to transfer the balance to this card. There is no fee assessed by Capital One for this service, even no finance charge, if you pay before the cut off date. Hence no cash advance fee, the most you pay is the 3% (or 4%) balance transfer fee.
~Don
Don, so the check you use is treated like a purchase? Brent was clearly excluding non-promo rate deals in his story. He seemed to be using a purchase rate of 12%.
Many customers don't have access to balance transfer offers. Using your plan, Don, what would you advise there? Arends, because of his math, assumed the a balance transfer offer was not available (or so it seems).
Don't know about other readers of yours, but I have a stack of balance transfer checks sitting in front of me with: no fees, and 0% to .99% and up. From Citi, PNC (Elan), B of A, and even Chase (.99% until 9/09, or 6.99% until 3/11).
~Don
Right. The problem is that Brett doesn't seem to be talking about 0% and other promo rates. Instead, he seems to be using a purchase rate -- of at least 12%.
If someone has 0% offers -- or other low rate teasers -- that makes more sense. But that's not what Brett seems to be assuming.
A possible defense: you have $2000 in credit card debt with a $10,000 limit and $1000 in savings and $3000 in monthly bills. You lose your job and think it will take 3 months to find another. You are short $8000.
If you advance yourself the money, get a job in three months, and then pay it all back it was a good move. Otherwise you could have gotten a CLD and then missed payments. Your lower score could affect getting a new job and 12% would be 30%.
That being said it wasn't easy coming up with that example. However as some readers like to point out all of the things that the credit card companies are doing to the consumer lately are "in the contract." If credit card companies want to remove all morals and customer service from the equation I can't blame consumers for doing the same. If robbing a bank was legal, yet still immoral, it may be the right financial move in certain circumstances. It sure feels dirty to think like a for profit corporation.
True. But to me it wouldn't matter how the card companies classify the loan.
~Don
Sam, it seems to me that you'd have to get a low-rate teaser -- and then have it "go to" the 12%. If Brett was suggesting that in his column, he didn't make that clear.
I'm still trying to figure out how someone gets a cash-advance at 12% out of the chute.
Who here actually takes out cash advances on their credit card and what is your primary reason?
A friend of mine who used to work at Wachovia said that Tim Thomas(NBA Player) used to come in at least once a month and take out a few thousand dollar withdrawls on cash advances from his credit card. It never made sense to me...
I'd be interested in whether unsecured debts that were obtained just prior to bankruptcy are likely to be discharged. I imagine that anyone utilizing the above strategy would have a difficult time convincing a bk judge to discharge the debt.
One doesn't get a cash advance at 12% out of the chute. But one can obtain cash via non-cash advance procedures. I know, as I've done it in the past. Probably it is trickier to do now than in the past. An added note: I doubt that many who would have to resort to this type of activity are readers of the Wall Street Journal.
~Don
Chris is right about getting a cash advance just prior to bankruptcy. Judge would not allow. But I think we are jumping too far ahead. Brett didn't suggest anything about doing this with the intent of declaring bankruptcy.
~Don
I know what Brett's thinking. My current case is a perfect example.
I have a job. I have credit card debt neighboring around $14k. If I elect to save for an emergency fund, that's money I'm not using to pay off my credit cards. Hence, I'm more or less borrowing from my credit cards at my purchase rate to establish my emergency fund. (I'm actually struggling with this right now... do I pay my purchase rate of 8.9%-10.9% (different cards) to establish my e-fund, or do I not establish my e-fund and pay off my debt a little sooner? I'm leaning towards the former.)
The same concept can be extended as follows: Get credit card. Make purchases. Make minimum payments. Put the money you would have spent on purchases in your bank account. Ergo, you're paying the purchase rate to save money.
Yes, I know in neither case am I claiming that one is directly borrowing cash from a credit card, but it's pretty close.
Sam, with regards to being "in the contract" I agree with you, and taking it a step further:
If a borrower borrows money and defaults on the loan, his credit report is dinged and his debt is sold to a junk debt buyer who may sue the borrower at the JDB's discretion.
Nobody may like the defaults, but it's "in the contract." So one could very well make the claim that a defaulted borrower is living up to the terms and conditions he agreed to when borrowing the money.
Brett is doing nothing more than encouraging the same irrisponsible behavior that got the consumer into this financial mess. What an idiot.
At no point in his article does mention the "robbing the bank" behavior one of the ways the CC companies are justifying jacking up interest rates and slashing credit limits to responsible borrowers.
Brett should be the newest member of the unemployment line.
CM, while not quite 12% (it's actually 13.99%,) PenFed CU charges this same rate for regular cash advances as purchases. (They periodically offer promo BT rates which are much lower).
Having said this, I don't know of any other creditor who offers nonpromo cash advances for the same rate as their purchase APR.
One caveat in using any cash advance is that a creditor may look on this behavior--especially in the current environment--as a "red flag," inviting a close review of your account.
Anon, thanks for pointing that out on Penfed. I think it's rare (as you alluded to). And also a good point about behavior -- and what creditors might think of that behavior.
This sounds no different than the app-o-rama they talk about at fatwallet. Find a 0% credit card intro offer, get a high limit of 20-50K, deposit the whole limit into a short term CD, at the end of the 0% offer pay back the amount to the CC and pocket the interest made from the CD.
The only difference being that Brett is talking about doing a BT that isn't at 0%. The FW deals wouldn't suggest doing something like this.
To advocate paying that kind of interest in order to quickly beef up ones emergency fund suggests to me the author feels some truly bad times are coming. It has a survivalist feel to it.
Don: are you sure about that? I know MBNA used to include those blank checks with each bill and they didn't charge any fee to use them, BUT they were considered a cash advance so you'd get nailed with the immediate high cash advance interest rates if you dared use one.
While it's not quite 12%, my Wachovia card has a 15% cash advance rate on it. Compared to the 5.2% rate for purchases. I know 15% is probably under the national average for credit card rates, but still.. ouch!
I'm with Anon @1047. I really think he's more implying to just use your card instead of cash, and leave the cash in the bank as an 'e-fund'. Especially since 'purchase' rates are mentioned. Makes sense to me, anyway.
I am in agreement with Parkabay.
I don't think he was talking about CA as much as I think he was talking about using your cards for things that you would normally pay cash with. I know that most of my friends don't use cards to pay electric, water, etc. and you could use your card for that and put that money away but the downside is if you don't get a job you will be up the creek.
My feelings are that you pay your cards and put away money. People have to cut back until it hurts because the cards may not be there if you need them to get you through. I also think that is why Suze is saying that because she knows that every one is getting rate jacked and CLD.
That is without question the worst financial idea I have ever heard. Ever! It's so unbelievable that anyone would even think of this let alone debate the "merits" of it.
I must be the most out-of-it person on earth. This is something I would never do. I work at a community college, and while my job is not guaranteed it is pretty secure. But if I were ever to lose it the first thing I would do is head over to Trader Joe's and apply for a cashier position there. It's rotten work (I hate retail beyond reason), the pay is not good, and the benefits take a year to come to you, but it is income. It is not borrowing. I would do whatever I had to do to stay afloat (having no credit card or other debt helps) without going into debt. I just cannot for the life of me understand the choice to do this.
You can get a cash advance from your nordstrom card for 7.9% or whatever your purchase apr tier is.
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