- December 21, 2007
- Posted by: thestateofart
- Category: Literature
JSB Morse’s new project, “How to Take Advantage of the People Who Are Trying to Take Advantage of You” delves into the complex world of personal finance and offers the reader a thoughtful and humorous look at many financial institutions like credit cards, banks, retail, and even the government.
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In addition to a concise history for each of those financial institutions, Morse provides 50 techniques that the average person can take advantage of to save or earn money, some of which are clever, and some of which are fairly obvious, but all of which actually work and can make you money.
Below is an exerpt from the first part of the book, which describes credit cards. After a funny and insightful history about the industry the author describes techniques on how to make the most of our business relationships with these companies. Techinique #9 is:
9. Make money off of the credit card companies
Andrew Kahr is known as the innovator of the credit card industry. His clients, financial institutions like Bank One, Schwab One, and CMA, have paid him to come up with new ways to take advantage of their credit card consumers. Since Kahr has been at it, he has changed the industry dramatically to favor his clients.
When Mr. Kahr entered the industry, lenders were requiring their customers to pay a standard minimum payment of 5% each month. Kahr suggested that consumers would be more willing to spend more and increase their debt if their monthly payment was lower. Most consumers feel that they are being prudent financially when they only have to pay $40 on a $2,000 debt instead of $100. This seems like a big difference, and it is. Customers with plans like these will end up spending twice the original loan amount by paying just the minimum, but they continue to do it, and they feel good about it. This was one of the consumer behaviors that Kahr was in tune with and was able to exploit for the benefit of credit card companies.
Years ago, Kahr also encouraged one of his clients to start doing business with people in other states so that they could take advantage of the usury laws of certain states. As described above, states like South Dakota and Delaware allow companies to charge whatever interest they choose to people even if they live in other states like New York. But most companies didn’t understand the process or thought it was illegal, according to Kahr. It was innovators like Andrew Kahr that most credit companies have to thank for their bulging wallets.
Another innovation Kahr implemented was the 0% short-term rate. He convinced one of his clients to provide loans with no interest rate to customers, new and old, on purchases and balance transfers for a short time only. In his plan, after the designated trial ended, the rate would return to the normal rate.
This proved to be a great way for banks to attract new customers and to get more debt transferred from another financial institution. Once all of this debt was built up in the new account, the interest rate would jump, and the company would begin to see major profits. It is a risk for the credit card company to do this, however, and the fact that they do it proves that the credit card business is dog-eat-dog. “T his is an example of how competitive the industry is, particularly in the prime card sector right now,” Kahr explained, ” that banks are willing to make deals with consumers that in some instances they require as long as two or three years to pass before they can get back what they have invested in terms of lending money at no interest and so forth.”
Most of us can take advantage of this competition and actually make money off of the credit cards. The process is simple, though it may require some diligence on the part of you, the borrower. If you take the money that lenders are willing to loan to you for free and put it in a money market or other investment, you can stand to gain a considerable amount of money, all at the expense of the credit card company.
I first got the idea to do this when I received an offer for a 0% promotional APR for an entire year on a Bank of America card that I already had. They gave me convenience checks that had no fee or finance charge associated with them, and I could cash them like any normal check or deposit them in my bank account. In other words, I wasn’t forced to transfer a balance from another credit card to take advantage of the nonexistent APR.
I deposited the money in my checking account, fought the urge to go on a shopping spree for large appliances and other things I didn’t need, and bought some stocks with the money. The stock rose over the next several months, giving me a return on my investment, and when the trial period was over, I sold the stock, transferred the money back to my bank account, paid off the credit card, and pocketed the gains.
I can’t recommend purchasing stocks for everyone since they are so risky–depending on the market, you could lose your whole investment (I’ve had my share of losses to be sure). One can buy into a mutual fund or other more reliable investment to reduce the risk or invest in an interest-earning savings account for even less risk. Though I put it in a fairly stable stock, the risk was still there. Luckily, I did end up coming out a little ahead with this venture, and there were other benefits that opened the door to a number of other opportunities.
One of the major benefits of this technique is that it forces you to save and invest money. Although the credit card interest rate is at 0%, the company still requires you to make a minimum payment each month, so you’re still putting forth some capital. The difference is that all of that payment goes to the principle of your loan, not the interest.
Let’s assume that the minimum payment for the $5,000 was $100 a month to make it simple. At the end of the year, you would have paid down $1,200 of the loan, which means, at the end of the year, you would only have to pay the card company $3,800 to pay off the balance. Since the average increase of the stock market of the last few decades is around 10%, you would probably be able to sell your stock at around $5,500. This would give you a net of $1,700 at the end of the year, a third of which was thanks to that kind credit card company that lent you the money.
Other ways that you can invest this money are CDs, which are guaranteed money, though they have a small return; money market funds, which return a bit more interest and are fairly stable; and mutual funds, which are slightly less risky than stocks and may cost you maintenance fees.
Detractors would say to just deposit $100 a month in a money market account and earn the interest that way. This is prudent advice. However, since the total amount is just a fraction of what it would be if you used the bank’s money, the return on your investment would be equally small. With the 0% loan, you can gain leverage and earn much more than you would with just your savings.
It is not advised to invest loaned money in your IRA or other retirement accounts, or in investments that you cannot liquidate immediately. This Ad-In technique requires you to sell your assets at the end of the promotional period and pay off the remaining debt so that you don’t incur any fees or finance charges. If you invest this loan into a retirement account, you won’t be able to withdraw before you’re 59-and-a-half years of age without a steep penalty, essentially defeating the purpose.
There is the option of transferring your balance at the end of the promotional period, which I did, to another credit card offering 0% APR for another year. The balance was transferred to this other card, again with no fee associated, for twelve more months. The first card offered another convenience check with the same offer, so I took advantage of that one as well.
On another occasion, I received an offer for a 0% rate on only balance transfers, but I didn’t have any balance to transfer that wasn’t already at 0%. I couldn’t take advantage of the offer because I couldn’t access the money they were willing to loan me. However, another card had mailed me convenience checks that would have incurred a 3.99% APR, and I could easily access that money by depositing it into my checking account, so I cashed a convenience check and immediately transferred the balance to the 0% card. There are countless ways to finagle these offers, but the value is there and it’s worth taking advantage of.
You can see how this technique could amass a large amount of debt and get out of hand in no time. It is important to keep track of each card and when the promotional trials for each card end. Write it down or, if you have access to a database program, compile a spreadsheet of the cards you have, their balances, their APRs, and when the introductory period ends.
If you don’t keep track, you could be stuck with a large finance charge after the rates return to normal, as happened to a friend of mine who attempted this. It ended up costing him over $140 in finance charges because he forgot when the promotional rate was going to end. Fortunately, he had made enough money in the sale of his stock positions to cover this loss. But, to be sure, it made the process bittersweet.
When done correctly, this technique can make you a substantial amount of money. I bought a small position of the search engine Google’s stock right after its initial public offering (IPO) and paid $110 per share. I sold the stock when it was at $180 a share and made a nice profit. Of course, I’ve been kicking myself ever since as I watch the value climb to $400 and more per share. A $5,000 investment in Google right after the IPO would have returned $20,000 in a little over a year.
Of course, stocks like Google don’t come around all the time, and even with stocks like Google, the increasing value isn’t guaranteed, as seen in the 25% drop in the beginning of 2006. The stock market is a risky place to invest money, especially if the money isn’t yours. There are other options, however, with this technique. If you put the $5,000 in a CD, you could end up with a guaranteed $250 at the end of the year. It may not seem like a lot, but it could certainly help with expenses around the holidays, for instance. Or, you could make a nice donation to your favorite charity at the expense of your friendly bank.
– Plasma