money matters

financial matters on a small scale are usually a waste of your time. what i've learned today is that no small amount of playing with money will make you any headway. the only way to really earn money is to EARN real money, like on a million dollar investments. other than that, things are chump change. and they usually bind you to a year's commitment for a total of about $40.

consider this: a few nights ago I decided to take out a balance transfer loan to pay for my student loans. now i realize this is just putting me under more risk for a long period of time. If i miss a payment, which i hope i won't, my promotional apr goes out the window and i'm stuck with a credit card debt of $5000. had i stayed with the student loan, i'd have a slightly higher interest rate, but far less risk.

the selling point was that i'd go from 5% APR to 1% APR (plus $75 transfer fee, which is about 1.2% APR.) So I figure that if i pay off the 5% loan right now, and use my citibank savings account, which pays 4.75% APR interest, i can slowly make money over a long period of time. now, the promotional 1% APR ends Dec 1, 2007, so I wrote up a repayment schedule to have paid everything by then.

Assuming a savings cash flow of $1500 per month, and a repayment of from $725 to $735 per month, I will be getting $133 in interest by December 1, and paying $22.12 + $75 for the credit card loan. If I stayed with the campus loan, I would pay $111.35 in interest, and will earn $106.91 of interest. The problem is that the interest i earn isn't very different, and the $75 fee was expensive. Overall, by this hairbrained scheme, I profit $40 by December.

Also, I tried comparing the credit card loan with a faster repayment schedule. If I pay off my loans by August, meaning $1450 per month for 4 months, I will have paid $61 in interest and earned $63 in interest by December. So I'm going to be paying $30 more in interest (from the fees) now by taking out the credit card loan, but earning $70 more in interest from my savings account. So that's about the same difference, only I have to pay twice as much per month.

i'm sure it's possible to make money on 0% APR balance transfers. That's not what I did this time because i didn't have any good offers, and even if i did, i'd end up with some 12 month commitment with a savings account in order to make up the money spent on the transfer fee.

The big lesson is that, these credit card loans aren't worth the trouble. They won't help your finances if you already have a decent student loan rate. If you're late on a payment, all this calculation is moot and you're stuck with 19% APR on a credit card debt. For that extra $40 maybe I should have stayed with the nice campus loan - i'll probably blow this interest money on beer next week anyways.