Permanent Interest Free Loans

debt-1Credit 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:

Spending Payment Balance
$2,000 $25 $1,975
$2,000 $25 $3,950
$2,000 $50 $5,900
$2,000 $75 $7,825
$2,000 $100 $9,725
$0 $2,000 $7,725
$0 $2,000 $5,725
$0 $2,000 $3,725
$0 $2,000 $1,725
$0 $1,725 $0

 

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.

Problems




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.

Debt Reduction

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.

Investment Acceleration

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.

debt-1500774_960_720Due 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.

 






The Wealthy Accountant and ADP partnership gives you top notch payroll service and support and a 20% discount. Click this banner or contact ADP by phone or email. Mention The Wealthy Accountant so you get your discount.

Keith Schroeder

7 Comments

  1. Gwen on November 7, 2016 at 9:27 am

    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.

    • Keith Schroeder on November 7, 2016 at 9:42 am

      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.

  2. Bill on November 8, 2016 at 6:59 pm

    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

    • Keith Schroeder on November 8, 2016 at 11:01 pm

      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.

  3. Bill on August 4, 2017 at 9:36 pm

    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?

    Thanks

    • Keith Schroeder on August 4, 2017 at 10:28 pm

      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.

  4. Credit Card Secrets | The Wealthy Accountant on September 21, 2017 at 11:29 am

    […] 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 […]

Leave a Comment





%d bloggers like this: