25 January 2006

When maxing isn't bad

Well, I maxed out my first credit card last weekend. I know what you’re thinking “That goes against every single rule you and every other know-it-all preach!” Well, it does in a way. But I’m not paying 25% or 15% or even 5% on that balance.

When we purchased our house, we inherited the washer and dryer of the previous owner. They were of unknown age and, frankly, pretty crappy machines. The dryer had started to go down the path of replacement. It would take 3 or 4 cycles to effectively dry clothes and fixing it would cost the same as a new dryer. We decided to go ahead and get the most we could out of the current dryer until an opportunity presented itself to replace it.

Well, that opportunity came in the form of Best Buy’s offer of 36 months zero financing. We could easily pay cash for the washer and dryer that we purchased, but Best Buy’s offer allowed us to make monthly payments and keep the money in our account, where we can earn interest on the amount of the purchase.

Even if we only earn a 3% yearly return on the $1,300 purchase price paid over 36 months (assuming equal payment amounts of $36.11 per month), I figure we will earn $57. Investing that cash in bonds will realize an even better return.

In my mind, this isn’t bad debt. We could easily pay for the washer and dryer in cash, but there was no discount for doing so. This way, we’ve earned interest of $57 that we would not have earned by paying cash. All the while paying no interest on the underlying debt (though, make sure to watch expiration dates so you don’t get hit with back interest of 18% annually). $57 doesn’t seem like much, but it’s a dinner at one of our favorite restaurants with money left over to pay a babysitter.

It still makes me slightly nervous to have one credit account maxed out (though we could probably ask for an increase if we really wanted to). I am conservative with money and don’t like to have large debts. I wouldn’t suggest doing this without the zero financing (making 2% and paying 18% doesn’t make a whole lot of sense), but these offers provide an opportunity to use arbitrage to earn a little extra on purchases that you would make anyway.

It is also not a good idea to max out credit accounts if you plan to borrow money in the near future. The percentage of open credit used is one of the items that make up your credit score and the higher the percentage the lower the score. However, we do not plan to borrow in the next couple of years, so we will have the balance paid off or largely so before we borrow, which will not hurt our credit score.

In a later post, I will discuss why Best Buy is able to offer so many 0% interest offers on their credit cards and how to avoid becoming a casualty of these offers.

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