Every day, I get all sorts of offers in the mail from credit card companies. I have plenty of unused credit, and, if my stack of mail is any indication, it appears that MBNA
But the latest offer I received was intriguing indeed: a convenience check from my credit card company with a guaranteed 3.99% APR for the life of the check's balance.
An enticing offer
If you haven't yet received one of these offers in the mail, be on the lookout. Your credit card company sends you a blank check and entices you with all sorts of sweet nothings to either deposit into your checking account or use it to pay for practically anything you desire -- your mortgage payment to Washington Mutual
Except it's not.
Now, I wasn't completely foolish (with a little "f") when it came to this topic. I had read one of Dayana Yochim's previous columns on convenience checks and similar ploys. I knew the dangers. Still, I couldn't get away from that 3.99% APR. With a rate that low, this was no ordinary convenience check.
So I dug a bit deeper.
All that glitters...
You can understand my attraction to such an offer in this environment of rising interest rates -- 3.99% is a whole 1% less than the prime rate (which, by the way, is the first clue that the offer is too good to be true since no one is going to loan you money at a loss). I thought that as a risk-tolerant investor with a long-term outlook I could borrow the money, carefully invest it, and simply wait until the market returned enough of a profit to call it quits and pocket the profit. The 4% interest rate is better than most margin rates, and there would never be a margin call as long as I kept paying the monthly fees. I'll reiterate: This would be a risky proposition -- borrowing to invest always is -- but one can think of much worse things to do with one's money.
I decided to calculate, Excel at ready, whether it would pay off to borrow $10,000 from the credit card company with this convenience check and then let the money appreciate for years in a variety of attractive investments -- perhaps SPDRs
Let's suppose I wrote myself a check for $10,000. First, I would have to contend with the hidden convenience check fee (how convenient!). On this particular offer, that fee came out to either $5 or 3% of the value of the check, up to $50, whichever was greater. So I would have to add a one-time expense of $50 to the total cost.
Next, there's the requirement to start paying interest on the total amount borrowed as soon as I cash the check. At the end of the month, that interest would be added to my credit card balance. The catch here is that I would also have to pay interest on the interest I was just charged -- and it wouldn't be at the low 3.99% APR but at my regular APR, which currently stands at 10.9%. Is that slick or what?
Now, this still wasn't a deal breaker -- even if it compounds on a monthly basis, 11% out of 4% comes out to less than half a percent per year. To keep this fee from getting out of hand all I would need to do would be to pay down the interest at the end of every calendar year and bring the borrowed balance back to $10,000.
...Nor is it silver
But then things got really interesting. A further reading of the fine print revealed the following sentence: "We will allocate payments to promotional and introductory balances with low APRs before applying payments to higher-APR balances."
Aha! As simple as it sounds, this is where the credit card company would really start to get me. Any attempts to pay down the higher-interest part of my balance would be futile as long as there was a lower-APR balance present. Try to pay down the accumulating interest and I would merely reduce the original loan amount that seemed so attractive at 3.99% APR. Now that's sneaky!
Still, I wasn't completely deterred. I calculated that after four years, if left untouched, these combined interest charges would push my total bill to just under $12,000. That's more than I originally planned to borrow, but I would still come out ahead if I could manage a 4.6% or higher annual rate of return during that four-year period. Most individual investors should expect annual market returns in the high single digits, so this still wouldn't be a radical proposition.
Don't be fooled
But it wasn't meant to be. I looked back at my old credit card bills and realized that the credit card company would stomp my idea into smithereens after all. On each credit card statement there was something called a "minimum payment due," and ultimately, this is what keeps the company from loaning you money at a loss for extended periods of time. Though I'm sure that specifics differ, my credit card company requires that at least 2% of the total credit card balance be paid down each month.
I reworked the numbers in my Excel spreadsheet, and the result wasn't pretty. This final stipulation meant that I would have to pay back the credit card company at least 38% of the total amount borrowed within the first two years. This negates the point of my original idea as there is no remotely reasonable rate of return that can fulfill that promise. I don't mind a little risk, but I'm not crazy!
Thankfully, I never pulled the trigger on this deal. And if a similar offer shows up in your mailbox, you shouldn't either. Instead, do what everyone should do with a credit card -- treat it like a check card with a cool rewards program.
Fool contributor Marko Djuranovic does not own shares in any companies mentioned in this article.