18 Dec 2008

Battening Down the Hatches vis-a-vis Credit Cards

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I have been telling Free Advice readers for months that the conventional old school wisdom is not necessarily correct in the present environment. Yes yes, you should cut your spending and save, but this doesn’t mean you should pay down your credit card balances.

However, there is a point of clarification that is in order. The rationale for my advice is that if and when prices go through the roof (and again, see my favorite chart below–which I often reproduce because some outside readers stumble upon an individual post through a Google search, not because they are my fans), you don’t want to hold all of your savings in the form of diminished dollar debt. On the contrary, your student loan debt, mortgage, car loan, etc., will all become smaller burdens if prices go up by 50% and (say) your paycheck goes up by 40%.

BUT, be careful. If you have huge balances on your credit cards, where the rate adjusts based on some formula involving the prime rate, then you could be screwed. You don’t want to get caught with $20,000 in credit card balances that roll over month to month at 43.9% APR. (You don’t want to have an ARM on your house, either.)

So what I just did was a balance transfer onto a Discover card at 3.99% locked in to November 2012. In a sense, it’s my way of ensuring I’m near the front of the line with all these new dollars Bernanke is handing out. Let it rain, Ben!

(Once more giving the lie to the alleged “credit crunch,” they gave me a $15,000 credit line based on my verbal statements of income, and of course on my credit history. The tightwads said if I wanted more, I’d have to provide them with documentation of my income. Oh the horrors! Where’s Steinbeck?)

In conclusion, I am saying that if you’ve got a bunch of disposable income you’ve freed up by cutting your spending (and good for you if you’ve got that discipline), I think it makes more sense for you to buy some physical gold and silver coins first, rather than paying off fixed-rate dollar-denominated debt.*

* If we have deflation for the next three years, then obviously this is some horrible advice.

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