Credit cards were always a powerful cash management tool for business owners. Individuals can harness the same power, but frequently use credit cards wrong, piling on high interest debt, and suffering financially. In times past, credit cards allowed for easy payment and tracking of expenses. As banks grew more competitive, the opportunities also grew. Most people are familiar with cash-back and bonus offers when opening a new credit card, but there is so much more.
There is a whole additional universe of value available from credit cards missed because it is buried in fine print. In this post we will focus on one of those benefits: interest free loans. Tomorrow I will focus on the litany of advantages you can use to make your life simpler.
Interest free loans from credit cards are not for everyone. I will focus on three groups who should find value in the strategy I will soon outline. The three groups are: people digging out of debt, people interested in accelerating their investments in index funds, and individuals and business with seasonal revenue.
How it Works
If you have a credit card you are aware of those checks they send you for cash advances at a 0% interest rate. That is not what we are talking about here. Those cash advance checks are junk because they charge a 2%-4% fee upfront. When I say interest free, I also mean fee free.
Many banks offer credit cards with a 0% interest rate on purchases the first 12-20 months you have the card. This provides a limited opportunity to cut some spending on interest. The strategy is as follows: You get two credit cards per year and use them like this: The first card is used for six months and the second card (acquired six months later) the next six months. See where I am going with this?
Okay, if you put every possible purchase on your credit card to max out cash, bonus, and travel benefits, you can also reduce your interest expense should you still be working out of debt. The goal is to never pay credit card interest ever! You have 12-20 months to pay off the card in full. By paying the minimum the first six months and then paying the card off over the next six months you effectively keep around half your spending available for investment or debt reduction.
It looks something like this:
Since you should be paying your current spending in full each month, you are never spending more than you have available to pay off the credit card. I used 10 months as an example, but you can expand this to any duration, depending on the 0% grace period of the cards involved.
It sounds like a lot of horsing around to avoid interest if you are on your way to financial security. It is. For many years I worked as a Dave Ramsey endorsed local provider. If I felt the client was disciplined enough to handle this strategy, I would teach it. By utilizing two new credit cards per year we could accelerate high interest debt reduction. In the above example we could reduce debt by nearly ten grand before we started paying off the new card.
During the 0% grace period, all funds used to pay the new card would be funneled to high interest debt. Then payments would be turned back to the new card so the balance was retired before the 0% grace period ended.
There are serious issues surrounding this strategy. First, if you have lots of debt you might also have a bad credit score. Getting a new credit card every six months could be an issue. Second, and this is the big one, it takes discipline. People with loads of debt have not been good in the past with money. Their discipline is suspect before we start.
If you have the discipline you can reduce some of that high interest debt so you can start investing toward financial independence. Once you have reduced your debt burden the rotating credit card strategy can be used to funnel cash into investments, but the returns are diminishing.
It is important when you are adding debt interest free to the new card that all funds to pay for that spending is allocated to high interest debt payments. Ten thousand dollars of payments shifted to a credit card at 18% is a $1,800 in annual savings. This snowballs (using Dave Ramsey’s term) into faster and faster debt reduction.
Another problem is not considering alternatives. Refinancing debt at a lower rate might be an easier and better solution.
Moving six months of spending payments to high interest debt adds to serious interest savings. Discipline is the hardest part. Delaying high interest expenses six months to a year still leaves you in debt! Bad spending habits in the past got you here; financial discipline is the only way out. Rolling up your sleeves and slashing spending is required, applying the reduced spending to debt reduction. It isn’t easy. If it was you would not be in this position.
Remember, you are not spending more than you normally would. You only shift your spending to a new credit card for half the 0% grace period and then use a new card while paying off the first. You are still accelerating your other debt reduction at the same time.
I don’t like this idea, but I will share it for informational purposes only. When debt is eliminated you can keep using the same strategy to funnel six months of spending into index funds. I think it is a lot of extra work once you are building your net worth to invest a half year of spending a bit sooner. You make the call.
A Personal Story
The third group benefiting from this strategy is owners of seasonal businesses. We will use my tax office as a guinea pig. As a tax office I am flush with cash April 15th. Year-end spending challenges the business finances while revenue tends to be lower than any other time of the year.
Up front, I never carry a credit card balance, but use credit cards for every possible business and personal expense. The business does have a line of credit which rarely gets used except as a tax management tool. If I can allocate funds in a way that reduces taxes I will use the LOC for a short period of time.
Due to the seasonal nature of my business (it isn’t so seasonal lately) we can apply the above strategy to manage cash flow. As the guinea pig, I acquired a credit card with a cash-back bonus and travel rewards. I will put every possible expense on the card until tax season when I will pay it in full. I’ve never done this before.
I really don’t need the extra funding this year for any major projects or tax reduction strategies, but it is a kick in the pants to harvest a few more bonuses.
Seasonal businesses can use this credit card strategy to avoid interest expenses while maintaining the business between busy times. Once again discipline is required. It is too easy to build debt. If you have problems handling money, this isn’t for you.
A large number of readers here are well on their way to financial independence or are already retired. I get enough requests from people starting out to make this post a valuable addition to the herd. Use it as you see fit. Also consider modifying it to your needs. The most important point is to think differently. If you act like everyone else, you will have what everyone else has. Better yet, if you tend to follow the crowd, hook up with a frugal group. It makes it easier when people around you tend to spend less.
Tomorrow I will dig deeper into credit card advantages everyone can use.
Use this link to help you research credit cards. There are a lot of choices. I recommend a card with a bonus and ample cash back. I did not include any of these benefits in the illustration above, but they increase the value. Finally, if you order a credit card and receive approval when you use the banner below, I will receive compensation. I thank you if you do. If you prefer to avoid such arrangements you can go straight to www.cardratings.com. You get the same exact thing, but I do not receive compensation. No hard feeling either way.
Note: Check the TWA Recommends page for all the latest best credit card rewards programs.
Thursday 6th of February 2020
I know this post is a bit late to the game, but there is a fourth and fifth option as well. I have done both. Carefully read through the credit cards TOS and even call and speak with different representatives to verify, but you could truly get an infinite cash free loan both with and without opening new credit cards.
Some promotional rates are incredible. Some offer 0% APR, others no fee and 0% balance transfer. So option 4 is simply purchasing on a 0% APR card for 18 months and rolling it over fee free to a new 0/0 card. At the end of that cycle repeat. You can theoretically push $10k+ in credit card balances 5+ years into the future only paying minimum payment and never pay a cent to the credit card company (actually negative interest if the initial purchase was cash back/points) This money can be invested or even just placed in a CD. As time moves forward, inflation eats away at the resulting balance, so you pay effectively less over time.
The final option (and this was my personal best) is some TOS and customer service representatives state that purchases bought at a certain interest rate are the rate you pay, unless the interest rate changes. However, the account closing statement would say something like if the account is closed, you will pay the interest rate at the time of account closure until the balance is paid off. I had a credit card that offered 0% cash Advances with no fee for a set amount of time. No Manufactured spending required, straight up cash advance. I took that money and rolled it over to a 0% BT card with a promotional rate. I then closed the account with a balance, which locked in the 0% promotional rate until 2099 (essentially life). It has been 0% for the past 3-4 years now, paying minimum payment. In essence, I took out a combination of $35k in cash and normal spending at no interest or fees, rolled it into a card with a promo rate, verified that the account closure would lock in the 0%, and pay the minimum payment on it until it pays it off (likely 25 years based on min payment) with inflation eating at the balance and the nominal cash savings growing in investments. There it is, a true interest free loan via credit cards. Cash value out, 0% interest for life.
Credit Card Secrets | The Wealthy Accountant
Thursday 21st of September 2017
[…] posts discussed bonuses, cash-back credit cards, and interest free/fee free loans. I consider those the easy benefit of credit cards. Debit cards offer limited bonuses and cash […]
Friday 4th of August 2017
I know this an old post, but it always stood out to me as creative and powerful.
Anyway, given your experience I have a question. I received a 0% offer on purchases last Summer. It had a $100 bonus too, so seemed like a win win.
The disclosure used the words "0% apr on purchases for 12 billing cycles." Billing cycle 1 closed 9/3/16 and stated the cycle was 31 days, meaning it started 8/4/16. Due date 25 days later, 9/28/16.
In my mind billing cycle 12 closed 8/3/17. I assumed the due date of 8/28/17 would be my last opportunity to pay the balance in full with no interest and that's what I always planned for.
To my surprise, I had an interest charge on said statement, so apparently my interpretation of 12 billing cycles doesn't match the bank's view.
I did use the money I borrowed to make much more than the finance charge and having lots of cash made life easier. It wasn't a deferred interest situation, so it wasn't a catastrophe. But this was an unexpected failure in my otherwise well calculated raiding of bank bonuses and credit card bonuses.
My question is in what way did I misinterpret the situation and have you run into this kind of thing?
Friday 4th of August 2017
The banks use the billing cycle closing date, not the due date, when determining when the interest free period ends. Therefore, you need to pay the balance in full by the due date of the prior billing cycle to avoid all interest.
Tuesday 8th of November 2016
I'm wondering about leveraging the 0% for tax breaks. In theory, you could front load some charitable giving you'd normally do the next year to better utilize itemizing one year and the standard deduction another.
I also considered the possibility of building up some cash to pay off the final year of a car loan and effectively get the last year interest free and make the final car payments to your 0% card before the interest free period expires.
Another consideration was to build up cash with the 0% apr offer and get some of the high balance deposit bonuses through chase checking/savings or capitalone, even if you wouldn't otherwise have 10k or 15k readily available.
My question is something up your alley. Let's say a family has 85k in income. They pay 3k health insurance, max out an hsa at 6750, and put in 5k in a 401k. So your agi is down to 70250. Let's say you freed up some cash through a 0% apr offer and funded an IRA to get your agi low enough to get a $400 saver's credit. What would an exit strategy be? Roth conversion and keep getting 0% apr card long enough (5 years) to take it out and pay it back? Any other ideas? Guess it may not be worth the risk of getting enough offers to span that long just for $400
Curious on your thoughts
Tuesday 8th of November 2016
I like your thinking, Bill. Getting the Saver's Credit is a one shot deal or you could do it every other year. If a family has an $85k income they should be maxing out the 401(k). Total annual savings for a family with that high an income should hover around $40k per year. Keep in mind the 0% fee free requires new cards under the current environment to keep going. The money cannot be spent.It has to be available to pay off the card in full before interest kicks in.
Monday 7th of November 2016
Just thinking about having "that much debt" hanging over my head freaks me out. I don't think I could handle seeing those negative numbers even if it was at 0%. I've never had any debt so I like to see that line in my budget zero out each month.
Monday 7th of November 2016
I agree with you, Gwen. This strategy is for someone digging out. Even my little experiment already annoys me. I started it a month ago and my stomach turned when I made the minimum payment. Still, people deep in deep looking to dig out can use this to their advantage. You will like tomorrows post more.