Tuesday, September 17, 2024 |
Scott: Mark, I recently received this very same offer! Additionally, I was interviewed by SmartMoney.com's Aleksandra Todorova for a feature story that talked about it as well titled, Free Cash! This is certainly one of the most creative transfer offers I've seen of late. The idea of 0% APR forever, the life of the loan, is almost too good to be true. And of course, as you have guessed, it is too good to be true. However, it still may be very good depending on how you can use this offer. We all know that there isn't any bank on this planet that is going to propose a deal that will not make them money. Yes, they're making money on this, and it's okay, the question is just how much and is it worth it for us to use the offer. This offer presents a very interesting math problem. As always, you need to know the question before you can get the answer. So the question is simply this, "What is the true interest rate (true cost) if I take advantage of the 0% forever transfer offer, when all the fees and terms are taken into consideration?" I've posted the actual letter that I received about the offer. All the deals are contained in here. To figure out if the offer is worth it we must first take a look at all the terms:
That information is still not sufficient to determine the true cost of this deal. You still need to know the purchase rate for the card, current balance, maximum available credit, how much you want to use for the 0% deal, and how much you're going to pay per month. Keep in mind that payments will be applied to the balance in a manner that makes the most money for Discover. That manner is to apply those payments to the 0% deal first and thereby, effectively, locking in all other balances, and future purchases, at the high purchase rate. See my article, How banks use low rate offers to lock in high rates for more on that. Here are the numbers, from my account, for these other details:
Tip: Be sure that your balance is zero before taking advantage of the offer. Do this by transferring that balance to another card first. Then, write the transfer check to yourself and pay off that card. Math details for the below examples are here.
Note: Calculation of true APR. The True APR, or rate of return on investment, or any periodic-rate for any period, can be determined using a Present Value analysis on the Cash Flow. In other words, the sum of the present values of the cash flow for all periods must be equal to 0. The rate of return that makes that sum equal to 0 is the true APR (periodic rate). The present value for any discrete period is A*(1+apr/12)^-n where A is the periodic cash flow, and n is the period number. In my analysis, I use the convention that positive money is received and negative money is spent (goes away from me). For example, spending $50 on the credit card is +50 because I received $50 from the bank (money to me), conversely if I make a $125 payment it's -125 because that is money leaving my hands. Therefore, the cash flow for that example period would be -75 (50-125). How's that for a long-winded answer to your question, Mark? Best, |
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