Thursday, October 8, 2009

A financial move that really doesn't make sense

The original article was seen on Yahoo the other day:  6 financial moves that sound good but aren't

I regularly read articles about personal finance on MSN and Yahoo. Most of the time, I end up following their suggestions and I also learn new things.  #6 listed left me scratching my head:

"Paying Off a Major Loan in One Payment
Advantages: You've been working hard and saving – smart! Before your loans start accumulating interest, or even if they have, you decide to pay them off in one payment. That's a wonderful accomplishment that will save you months', or years' worth of interest.

Downside: If you choose this route, make sure you take a look at your interest rate. Some loans have such a low interest rate that you'd be better off putting your money in a savings account that earns you a higher return and paying off your debt monthly. Keep in mind this is only a good idea if 1) your savings interest rate is higher than your debt interest rate and 2) you are disciplined enough to pay the debt off on time, every month, and not to spend your hard-earned cash on luxuries instead. The bonus? Responsibly paying off monthly debt helps you to establish a good credit history. This is especially helpful if you don't have a credit history (or you are trying to rebuild a bad one)."

Here are some rates from the major US banks. Keep in mind that these rates are for simple savings account, and most banks require a checking account in conjunction.

With Bank of America, "interest is compounded daily and paid monthly." Regular Savings Account Interest Rate is 0.10%

Wells Fargo: 0.05% Compounded Daily. The interest rate increases an extra 0.10% if you have a Prime Checking Account with them, and also an extra 0.40% if you have a balance over $25,000.

J.P.Morgan Chase is a bit more competitive: for balances $0-$9,999 the APY is 0.10%, balances $10,000-$24,999 it jumps to 0.35%, and continues increasing 0.15% each time it doubles the previous tier.

However, the highest I've seen was with Citigroup. They can offer 1.25% APY with a minimum balance of $100.

Now I don't know of a single bank that will give you a loan for under 1%.  If you do- shout it out! The only ones that will are for their introductory offers- the ones for 0%, and it's not a loan, it's basically a line of credit that will only last 12 months. Ok, that would make sense, but only until you pay off the balance in full by the end of the offer. And granted you aren't late on a single payment, or else they will rescind the offer, charge with a late fee, and charge you the interest you've accumulated since your purchase. This happened to me with Bank of America. I made the payment on the day it was due, but at 5pm Central time. Their cutoff time was 3pm Eastern time.

I was able to fight off the late payment fee of $39, but I lost my 0% APR offer. You can bet your ass I paid off my balance within 2 months to avoid payment interest when I had the money handy.

So theoretically it is acceptable not to pay off a credit card  if its interest rate is lower than what a savings account will give you, but where do you find such a bank??

1 comment:

  1. It's all so confusing. When I was buying a house in the 90s, I was told to close all credit cards we weren't using because every credit line would count against us for the full amount. Now I'm told if you close a card, it will count against you and that having that credit line actually looks good? I guess before I buy another house, I'll ask them what to do because I still have a Macy's card I never use (I had to have it when I was a part-time employee with Hecht's to get the discount and it converted to Macy's when they were bought out).