Our revolving credit card balance is shrinking almost by the day. I am fairly confident that we will pay all of it off by the time this 0% APR introductory expires in April of 2011. The card comes with no annual fee, but there is a balance transfer fee. 4% of the balance for transfers initiated during the application process and 5% for balance transfers initiated after the application. My wife was approved for the card in 60 seconds, but we are still waiting to see if her credit limit will cover the amount of money that she needs.

If you are interested in finding more about the Discover® More® Card read more here:

In this economy, we need to save every penny. I control my spending, always pay off my balance and get great cash back from Chase.

Discover has just released a new product into the marketplace. I don’t have a huge problem with credit cards, however, I ‘m not sure that I will be jumping on this band wagon. Let me explain.

The Current by Discover is a prepaid credit card that is intended for teenagers. The card allows parents to monitor and contr0l spending and set limits and boundaries on their financial habits. Parents can directly deposit money from a bank account or another consumer credit card. The card comes in all sorts of hip designs and a $5 per month or $50 annual fee.

It is unclear to me whether or not a deposit to the card counts as a purchase or a cash advance on the regular credit card. For instance, my Miles by Discover gives me rewards on all purchases. If I get the Current card and load it with a $100, does that count as a purchase and will it generate rewards on my Miles card? Not sure about this.

My thoughts against the Current by Discover card:

My wife and I have to work hard in order to control our credit card spending. It is definitely easier to spend extra money with plastic and I am not sure that I want my child to get used to swiping plastic for everything he wants.

My six year old already thinks that I can buy anything she wants “with the credit card, Daddy”.

Credit cards feed impulse purchases and I don’t know if I want my child to ever purchase anything on an impulse.

My thoughts in favor of the Current by Discover card:

If a child happens to travel by himself a lot. The parent would not have to load the card unless he was on a trip. This might work especially well if there was an emergency flight delay and your child needed to stay overnight in a hotel or airport. You could deposit money to the card that he was carrying and he would not have to depend on emergency cash.

If your child is on a traveling sports team or singing group and needs to purchase food on the road on a regular basis. Once again, he would not have to carry cash or worry about losing the money.

You would have a full accounting of every dime that your child spent in the last month. You could sit down with him and discuss every item. Cash does not have the same accountability.

Personally, I think that the best accountability develops when a child earns, manages and spends his own money. If he earns $50 by mowing lawns, it is up to him whether or not his effort and sweat is worth another video game. He learns to develop a sense of relative value in regards to money.

If you are an ATM parent in the first place – you know, the kind who throws $20′s and $50′s at their children whenever they ask? Then the Current by Discover teen prepaid credit card might actually help you teach your child a little financial self-control.

As long as you promise not to fill it up more than once a month.

I generally oppose adding debt, especially when debt is being used to finance a lifestyle that does not fit your income. However, there are times when a loan is the only way to solve a major problem. Obviously, you will want the lowest interest rate possible on that loan. Introductory offers on credit cards sometimes provide a short-term solution to an emergency or jump start your efforts to get out from under a debt snowball.

Last week we discussed and balance transfer arbitrage, the app-o-rama and began a discussion on how to use a 0% APR introductory offer from a credit card company. Today we will finish that discussion. Here are some possible scenarios and tips:

0% Purchase rate for 12 months

If you get an introductory offer for 0% on purchases for any length of time, it is an easy way to catch up on your monthly budget and possibly earn a little bit of float interest. Here is how you do it – on payday, deposit your entire check into your savings account. (I use FNBO Direct) Then use your new card to follow your regular budget to make purchases for the month. You can even pay many bills with a credit card. I pay my wireless bill with one every month and get cash back from the card. At the end of the billing cycle, only pay the minimum amount plus $10. Let the rest of your money sit in your savings account. Repeat this for twelve months and then use your savings to pay off the card at the end of the year. Remember do not to go over your limit and do not purchase items outside of your budget. WARNING: If you lack discipline, if you can’t follow a budget, then do not even attempt to pull this off.

0% APR for balance transfers – cash method

This is tricky sometimes, but there are ways to get a large amount of cash to sit in your bank account and earn interest.

The first way is to have the introductory balance transfer applied to an existing card that has no balance. For instance, you have had card A for three years and you are no longer using it. You apply for card B that has a great balance transfer offer. During the application process, you request a balance transfer payment to be made to Card A. The balance transfer shows up as a credit on Card B statement account. Just request a refund check and deposit it in your bank.

Another method is to charge up Card B with purchases that you normally make and then transfer the balance to Card A at 0% APR. Then let the money that you usually use to pay off your card every month sit in your savings account earning interest until the introductory period is up.

When the credit card company sends you balance transfer checks, you can often just deposit the checks into your savings account. Even online banks have a procedure for depositing physical checks.

If you have a checking account with the same bank as the credit card for which you are applying, ask to have a balance transfer deposited directly into your checking account. Bank of America did this for me.

0% APR balance transfer – debt reduction method

If you  have staggering piles of high interest debt, you can use a 0% introductory offer in order to pay off more principle. For instance, if you have $10,000 worth of credit card debt at 18%, a 0% balance transfer could save you almost $1,800 in the course of a year. With no interest for a year, you could put all of that $1,800 toward principle instead of toward interest. Furthermore, if you have that kind of debt, your credit score is probably in the tank. Twelve months of on-time payments and reducing your overall debt by almost 50 percent can only help. Even a 0% balance transfer with a 3% fee is a good idea if you are paying the standard credit card APR’s.

A few more suggestions:

• Make sure you research the card you want. Do your homework.
• Remember that a 3% fee for a six month balance transfer translates to 6% APR.
• Do not close credit card lines of credit, even if you no longer use the card. This hurts your credit score.
• If you have more than one existing card with a particular company, ask to combine lines of credit before applying for another card. This might allow you to get a higher amount of money from a balance transfer offer.
• Pay on time.
• If you have a balance transfer on a card, do not use that card for purchases. Your payments will be applied to the balance with the lower APR.
• Don’t be late in paying off your balance in full. Call to make sure that you know when interest will start to accrue.
• Make sure you check your credit score before you apply for a card. Here is a good place to find your score.

Credit card companies are looking for ways to make money from their products. They exist to make a profit. But if you are careful, read the fine print and stick to your plan, your plastic can make you a little green.

In my previous post, I explained the terms ‘balance transfer arbitrage’ and ‘App-o-rama’. Both strategies are risky, but there are definitely instances where an introductory rate on a credit card can be leveraged in order to give your family finances some breathing room. If you have good credit, if you plan carefully, if you keep good records and if you can follow a schedule, balance transfer arbitrage or even an app-o-rama make a whole lot more sense than continuing to charge up high interest credit cards or taking out a payday loan.

I have executed balance transfer arbitrage several times over the past three years. We have kept $5,000 to $10,000 worth of interest-free loans sitting in our bank account over the last two to three years. I once even did a limited AOR – limited because we only applied for a dozen or so credit cards. (Real AOR’s typically involve close to 50 credit card applications.) At one point, we had over $60,000 worth of balance transfer money in the bank. It is a little nerve-racking to have that kind of money sitting in an account and knowing that it all has to be paid back, but we made quite a bit of interest from that money at a time when online savings accounts were in the 4% to 6% range. I don’t think I will personally ever do another AOR, but if you are considering using credit cards to generate some extra cash, let me familiarize you with a few terms:

Credit Score

Every application for credit affects your credit score, regardless of whether or not you are approved. The reality is that you are selling your credit score. BTA will hurt your credit a little, an AOR will trash it. However, your credit score will recover and then improve a great deal over the months after your AOR. Important: If you plan to apply for financing for a house or car in the next year, do not attempt an AOR.

Cash Advance

You must read all of the fine print on your credit card applications to make sure that you do not trigger a cash advance. Cash advances are never interest free and they are usually accompanied by high fees. Sometimes credit card companies will send you checks that with which to make a purchase, a balance transfer or access a cash advance. Sometimes several checks will come for the same card – and each check will have a different set of restrictions. These checks can be useful, but I always call the credit card company ahead of time to clarify the terms before using one of these checks.

Fees

This is where credit card companies have gotten a little smarter over the past 12 to 24 months. There are very few balance transfer offers that do not include fees of at least 3% anymore. What you need to look for are offers with temporarily waived fees or capped fees. If you are transfering a balance of $10,000 and the fee is 3%, you will pay $300 up front. However, if the fee is capped at $75 or $99, this offer could be a pretty good deal. Sometimes, you can beg your way out of paying a balance transfer fee with the customer service rep on the phone – ymmv.

Credit Limit

Never close a line of credit if you can help it. Closing a line of credit hurts your score. Try to keep your overal credit usage between 50% and 75%. Add up all of your lines of credit and then decide how much balance transfer money you can try for. For instance, if you have credit lines of $200K, you don’t want to use more than $100K to $150K.

Liquid Accounts

There are stories of people playing the stock market, purchasing T-bills or investing in mutual funds using balance transfer money. I think this strategy is begging for trouble. Keep the money where you can get it instantly. If you mess up a payment or your investment tanks, you need to be able to pay off your balance quickly. I keep my money at FNBO Direct or ING Direct. (If you would like an ING referral with a $25 bonus, request one via email.) I should not have to say this, but here goes: don’t spend the money.

Payments

You need to make sure that you make all of your payments on time. A late payment can trigger fees or an interest rate hike. Credit card companies are required by law to set minimum payments for at least 2% of your balance. I always pay $10 more than the minimum payment. If you only pay the minimum payment, this can hurt your  credit score.

In my next post, I will discuss different techniques for taking advantage of a 0% credit card introductory offer.