16 Oct 2008

"Credit Cards May Be Next Trouble Spot in Crisis"

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So warns CNBC. Jeez, I could have told them that ever since my first semester in grad school!

On a more serious note, I actually advise in this article that paying down your credit card debts might be the wrong play in the present environment. NOTE, I am NOT saying, “Go charge a bunch of electronics because the dollar is tanking.” Rather, I am saying that instead of paying down your balances–which you should be able to shift to a card with a very low APR, for a 3% transfer fee–it might make sense to use your current surplus to buy gold and silver coins, or some other asset not denominated in US dollars.

Keep in mind, however, that for this strategy to work, you will need to be able to pay off your credit card balances once the introductory APR expires (probably in 9 or 12 months, depending on the offer you get). Because a year from now, interest rates might be sky-high, and you definitely don’t want to be stuck with $20,000 in credit card debt at that time.

So for example, let’s say that today you buy $2,000 worth of gold and silver–and we’re talking physical coins, remember–instead of paying down your credit card balance. Then in 10 months you sell $2,100 worth* of the coins back, which you will be able to do if precious metals go up 10% or more. Then you pay down your credit card balances, and you’re better on that front than if you had paid them down today. Plus, depending on how much gold and silver go up in the meantime, you are left with some coins even after selling $2,100 worth.

Naturally, if gold and silver go down, then the above strategy stinks.

* By phrasing it in terms of how much money you are raising, I’m taking into account the bid/ask spread, i.e. the fact you pay more for the coin than the dealer pays you. But if gold and silver rise a lot, then even accounting for the spread, you can end up with coins left over even after getting your credit card balance down to where it would have been had you paid $2,000 off today.

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