Simple Lesson On Interest Rates (Apex Predatory Lending)


Interest rates for some grown adults, believe it or not, is a foreign concept. That's because all of us in the United States have never been taught these valuable finance lessons until we've turned into adults and either have had to learn it the hard way or never learn it at all. To be honest, that's one reason why I went to college for finance, because I wasn't taught this by anyone - even my parents. Ironically enough, business college was also attributable to the single largest debt I have to this day (but that's for another blog post).

Personal finance is a muscle. The more you pump the iron, the more muscle you build. It's also similar to Brazilian Jiu Jitsu in that everyone has different paths towards similar destinations. There are different ways to finance anything, and build wealth. Some might be more risky and creative, whereas others will trod on the beaten path (conservative). But for most, interest rates are the linchpin that either makes or destroys your personal finance. Here is a simple lesson on interest rates from a credit card point of view.

Let's take a look at CapitalOne's SavorOne Mastercard. The terms are enticing. They have 0% interest rate for 15 months, after which the interest rate will either be 15.49%, 21.49% or 25.49% based on creditworthiness (basically you're at the mercy of their risk-management department filled with quants and statisticians that calculate how risky you are based on your credit score and other criterias). They also offer 3% cashback on all dining purchases, 2% on grocery stores, and 1% on everything else. They also incentivize you to apply for their card by offering $150 for $500 spent within 3 months of account opening. Based on this card only, I will tell you the best way to hack this card, and the pitfalls of all credit cards in general.

CapitalOne SaverOne Mastercard Hack

You should only apply for this card if you are guaranteed to spend $500 on normal purchases or expenses that you normally have right now. If the 0% interest rate for 15 months induces you to spend it on stuff that you normally wouldn't have purchased, then this card is not for you, and obviously you have a problem to fix before even thinking of opening up a line of credit. There are two ways to spend the $500 to receive the $150 credit. The first way is the most conservative way, and the second way is the most riskiest (And something I haven't yet tested but will very soon).

1. Pay for stuff you normally would purchase now

This means that you have regular bills which you can put on this credit card for at most 15 months (with 0% interest rate) that will fill that quota of $500 to receive that $150 cash reward. This is the least riskiest method because it means you aren't spending over your means and are actually saving money on bills for a month by receiving the $150 cash reward.

2. Manufactured Spending

This means that you spend the $500 using this credit card to purchase prepaid debit cards or gift cards and then use a money order from various kiosks such as Western Union, or Walmart to spend the prepaid gift cards and send it right back to your bank account (net of fees) to pay off the credit card expense you just incurred. This is extremely risky because there are a growing number of merchants who have stopped taking money orders using gift cards or prepaid debit cards, but it can still be done. Also some prepaid debit cards may not be accepted at all locations, as the merchants backing the debit cards may be a merchant they don't accept prepaid debit cards from.

The plus side of this method is that even if you have prepaid gift cards that aren't readily convertible for hard cash, there are options out there. One thing that comes to mind is using the gift cards to work for Purse.io You can shop on Amazon for people who will pay you in bitcoin. That's a high risk endeavor, but it will definitely curb some of the costs especially if you receive bitcoins at a good price.

Or you can also hook up the prepaid Discover, American Express, Visa or Mastercard (crucial) debit cards with your PayPal account and pay off any bills that you normally would have using that account. Or you can hook up your Venmo account, with the prepaid debit card as a payment method (and set it to backup funding), then send it to a trusted friend who will give you your money back via cash or bank transfer. This wouldn't be considered illegal as it would all be clean money that doesn't need to be washed, but once again I'm not a lawyer so consult a professional before doing anything like this.

Once again, manufactured spending is risky and discouraged, but still legal. However consult a legal professional before ever considering doing this to make sure you are doing this legally, ethically and correctly.

How To Spend Money Using CapitalOne's SavorOne Mastercard

It's incredibly easy to spend money with a credit card that offers 0% interest rate for 15 months (or more) because it lulls your brain into a false sense of security. It also doubles that sense of security whenever you find deals online, or at your favorite store, that puts you into FOMO mode or grants you self-justification for your purchase. I've done it; we've all done it before. Even personal finance veterans fall into this trap at times. With the SavorOne, it traps you a third time with their incredible cashback rewards system. Life can entrap you a fourth time whenever you have emergencies and you have no choice but to use the credit card to purchase the emergency despite cash in the bank (because you want to lower your cost basis and get the 1% cashback reward). Once again, if you have trouble with spending, this is not the time to apply for this credit card. It may do more harm than good.

The Best Way 

Set up your cashback rewards to accumulate over the 15 months and never spend it. Whenever you purchase things using your credit card (for things you need or things you want), pay it off immediately. Ideally, you want to lower your cost basis even more by using gift cards that you accumulated using the free passive income tools I use and talk about on Dividend Hack or Dividend Raptor.
 
If you have credit card debt or student loans, use the money that you accumulated over the past 15 months and then pay off your lowest loan amount first (I use the snowball method) ideally before the end of the year as there are tax advantages to paying off student loans.

The Second Best Way 

Set the cashback rewards to pay off your credit balance immediately. If there is a minimum cash out, then set it to the minimum. This will lower your cost basis, so you would have to pay off a lower amount each month. Ideally you want to pay off the balance immediately after paying for it, but if you don't want the hassle of constantly monitoring your balance, then set an auto payment according to your budget. If there is a purchase that goes above that balance, you would want to pay it off immediately.

The Worst Way (Riskiest)

Don't think about trying to create a method whereby you purchase something that doesn't have an immediate ROI, is a big purchase, and you need to make payments on it before the 15 month 0% interest rate term is up. For example, let's say you self-justified yourself into purchasing a $500 Jake Paul YouTube course; or a $677 Tai Lopez Social Media Agency course, and wrote it off as an education expense that might ROI in a year. You might also doubly justify it (sense of security) by saying "I'm going to make it work so this is an investment that is a make it or break it". Those are the moments where you have to slap yourself hard (figuratively or literally), and think about what you're doing. Is the education really worth that much, and will it help you at the very least informationally? If it doesn't have at least one of the two, then I'd probably not spend it. If it's a big amount that you simply would have a difficult time paying off (almost a year), then it's probably not the right time for you to buy. Tony Robbins is a great example of this because his mindset induces you to spend money on his courses or seminars because it's a "don't be a Pussy Ass Bitch! (PAB)" mentality that closes you to buy.


What If My Credit Card Has Interest Rate & Annual Fee?

The only way that a card such as this would be worth it is if the value you receive outweighs the annual fee and if you have the cash to pay off each expense outright immediately. Most interest rates accrue daily. This means that if there is an APR (Annual Percentage Rate) of 20%, it accrues 0.00056% per day.

i.e. if you have a credit card balance of $1,000; interest accrues by $0.56 per day or $17 per month.

Depending on if it's a travel card or a cash back card, your total purchase-cashback must outweigh the annual fee amount. So if there is an annual fee of $95, your total cash back rewards should be at least $95 or above that. If it's a travel card, you must be able to at least travel for free worth $95 round trip + all of the interest payments accrued, or more.

For interest accruing cards, I would not play with fire. Pay off each purchase immediately after.

What If I Have An Emergency Purchase? 

Emergency purchases always fuck with your rhythm. It. Always. Does. Never diminish this concept. You might have a great rhythm going whereby you pay off each balance per month and some extra;  but then you have a medical emergency such as your dog dying and you had no free cash (was all tied up in investments) but your credit card. So you purchase the medical procedure using your credit card and now you're down $800 and you have to pay it off a little bit each month without dipping into your investments.

This almost always happens to everyone; sometimes once or twice every year. It's why for these moments, the least riskiest method for spending your rewards card, is the best method. You never know what's going to happen so that is why you always pay off your balance in full, and accrue any rewards and cash in savings for a rainy day. You never want to start over from zero from any of your investments, so the next and best method is having the least riskiest, but most valuable outcome for your credit cards.

There are two types of people in life: People who utilize the Dave Ramsay approach and pay off their debts with every remaining capital, and never using credit card debt at all; Then there are others, like Steven Liao who use credit card rewards to profit and get richer every year while increasing their creditworthiness. The first has zero debt but not nearly enough investment value (as they tend to buy and hold long-term ETF stocks with cash after all expenses or debts) for the amount of time and energy they spend paying off debt. The second employs riskier strategies to get ahead, but has higher reward based on the amount of risk or "perceived" risk.

Credit cards and interest rates are some of the easiest and best ways to get into debt. So be an outlier and a 1%er when taking advantage of the incentives banks lull you into. You want to be the guy who legally hacks as much value from the credit cards as possible. If it's a travel card, you want to make sure you're getting into all of the lounges at little to zero cost, and travel in first class for just the purchase of baggage. If it's a cash rewards card, you want to lower your cost basis or be richer than you were before you got the card. Cash is definitely not king. 2 to 4% inflation rate rots it, and it amplifies when there are interest rates from credit lines involved. Make sure you're the 1% who milks every last drop of value from the banks, and not the one that plays catch up every year.

P.S. Here is a cool video I made that might be beneficial for you in paying down your credit card debt every year assuming the parameters are similar! (Not advice)


Post a Comment

0 Comments