Calculating Value of Credit Card offers. Value of Mileage

As these tumultuous economic times continue many of us are once again seeing a flurry of credit card offers with many different sets of bonuses and conditions.

We thought it might be helpful to give a few simple rules of thumb for evaluating card offers.

1.  Just say NO to fees or high interest cards.    Even as general interest rates have fallen to some of the lowest levels in history, “normal” credit card interest rates and fees remain exorbitant and usurous in all but the legal sense. Credit card laws allow large fees for small trangression and huge interest rate caps, and are a great example of how market greed and government incompetence combine to create terrible conditions for most people even as they create opportunity for the clever among us).   Summary:  Avoid cards with annual fees.

2. PAY OFF your cards before due dates.    Even for credit cards with borrowing rates that are outrageous   (which, these days, is pretty much any rate over about 6%), you get a 0% loan from the time you buy to the time you pay IF you pay off the balance by the due date.     Do it.

3. DO NOT take “cash advances” on cards except at introductory rates and then ONLY if you’ll be paying it back as soon as the rates rise.   Cash advances, unlike purchases, usually start dinging you with interest the minute the check  or advance is processed.    Avoid these cash advances with one exception – low introductory rate offers can be used to your advantage if you are clever and calculating enough to pay off the balance as soon as it is due.  This is critical as the 0% offer can skyrocket to 20% or more overnight, leaving you with no deal whatsoever.    To complicate matters different cards have different dates calculations and often even representatives on the phone will not advise you correctly on when the rate skyrockets, so when in doubt pay early on these “cheap loans” from introductory rates.    ONLY do this if you have other sources (e.g.  low interest equity line of credit) from which to pay the card.   Letting an introductory rate “ride” as it skyrockets is a recipe for disaster.

4.  What are miles worth?    Consider mileage program miles to be worth about a penny when the program gives you a round trip USA plane ticket for 25,000 miles.   For example, if a card offers you 25,000 bonus miles consider this value to be $250 cash (.01 x 25000) .     Why this number?   Generally you can get a round trip ticket in the USA for 25,000 miles with some restrictions.     I compare the mileage ticket with paying 250-450 cash for a less restricted, easier to book ticket.    Also, cash is almost always better than less fungible forms of value like certificates so it is not reasonable to say a certificate worth a ticket is the same as the cash it would take to buy a ticket.  This is a rough measure, but it helps with the calculations when comparing credit card offers.

5.  SWITCH to “no fee” cards.    If you have a fee card or if you participate in an offer where the card is “free for the first year”, be aware that many cards will allow you to switch to “no fee” cards when you threaten to cancel.    Often, cards with a second year fee have great introductory offers  (we just signed up for 75,000 bonus miles from an AA Mileage card offer), but the catch is that after the first year you’ll be paying a huge fee.    In these cases consider avoiding the card altogether or, if the offer is great, call in after 11 months and insist on cancelling – often you’ll be offered a new “no fee” card.

6.  Keep good records.    Don’t play the credit card games unless you have good systems for keeping track of card due dates, offers, fees, etc.  Those with excellent credit can save thousands using introductory offers and rates, but only if they avoid the huge penalties and interest that follow mistakes in paying off cards or following directions.    Always remember that these offers are basically marketing tricks to get you “hooked”.  However unlike most other gambling environments there is a path here to net gains if you play carefully.

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