In the theatre it’s called “suspension of disbelief”. In science it’s simply a hypothesis.
Bear with me.
You start a new account on the 1st of January. It has a credit limit of $10,000.
Filled with excitement and enthusiasm for your new super-power, you immediately spend it all. If you wish to buy a coffee each day for the next 55 days then you will need to pay down a few dollars before presenting your card.
Yes. I know. It was going so well with your interest-free $10,000 and now you’re out of pocket. The credit card is maxed out and you face the supermarket shame of being “declined”.
Stay with me or go without coffee.
After 30 days, on January 30th, the last day of the month, there is still nothing to pay. It’s after 55 days, on the 25th of February, that payment becomes due or you will be subjected to punitive interest rates.
Armed with the wisdom of your mentor (me) on the 25th of February you pay off the $10,000 thereby both clearing your debt and availing yourself of a renewed $10,000 credit. Importantly, this credit will last for 55 days but not from the time it has been paid and drawn but rather, once again, from the 1st of the month of February. Your bill, payable on the 25th of March, includes all transactions within the month of February.
Now, you recall how you paid it off on the 25th of February? At that instant in time you were deemed to be a reliable creditor, the sort of person who could, once again, be trusted with $10,000 and not a penny more.
In the world where banks were once populated by real human beings, salarymen seeing out their time behind a grille, you might be tempted to wait a day or an hour or seek a different branch, to reapply for the $10,000.
Nowadays the “bank” is likely to be just one guy offshore making sure that the server has power and is not overheating.
Having paid off the full amount on the due date you can probably pause and get yourself a refreshing glass of water from the tap. For you, this will take thousands of milliseconds. For the computer, it will be a lifetime.
You are good to go. Remember your beloved $10,000? Spend it again.
There you have it – $10,000 interest-free, month after month.
March has arrived. As a customer of good standing and integrity, why not enquire as to whether your credit allowance might be increased to $……….
A million dollars, here we come.
The fine print
Welcome to the fine print, a foreign land filled with things you never realized existed.
If you have read these before, please accept my commiserations. Perhaps the most tedious part of an undergraduate law exam is absorbing pages of contract law.
First the checkbox:
- I understand and agree to everything.
- I would now like to scroll to the end pretending that I have read and understood everything that follows.
0. Each month has 30 days and there are 12 of them. If this hypothesis annoys you, keep reading. It gets worse.
The reason your credit card bill creeps seemingly unpredictably around the month is that the 30-days-in-a-month proposition is false. What is clear and mutually agreed is that the bill is for a 30 day period and must be paid after 55 days.
1. In the unfortunate event of my demise, my children are hereby put on notice that the untold riches that I bestow will be accompanied by a $1 million debt to the credit card.
They are uninterested but not disinterested and hereby forewarned in the unlikely event that they read this.
2. It is unlikely that the bank will increase my limit to $1 million. The gold card which promises “unlimited credit” is not actually gold. It is golden plastic. Furthermore, interrogating their website to find a credit limit, elicits the response “Sorry, it is unlikely…” and suggesting that you should call them.
I suppose it’s nicer to be told “No” by person rather than a computer.
While we’re here, the paper statement shows the “Amount Payable” – everything you have borrowed. It should read “Amount (not actually due but) Payable”.
3. The $1 million headline is clickbait – a falsehood, preying on your greed to induce you to read this story.
4. In order to borrow $10,000 interest-free you need a lazy $10,000 to show that you are good for the money. Thus, to borrow a million you would need, for a matter of milliseconds, a lazy million.
5. You can’t pay off a credit card with another credit card. I’ve tried it.
Now that you have $10,000 from the bank, what will you buy? Property seems to be the most immutable in value. It would be nice if you could buy just a square metre on a vacant block but lawyers and real estate people seem unfamiliar with this approach.
The stock market is a volatile belief system where value is simply what you think it is.
A last depressing thought: Why not buy shares in the bank that loaned you the money?
Just max-out your credit card. It’s their money not yours.
In conclusion:
There’s a crusty paradigm.
If you owe the bank $100, you’re in trouble.
If you owe the bank $100 million then the bank’s in trouble.
The bank will not endanger itself by allowing you unredeemable amounts of credit. It will allow you just enough to slap your wrist with interest rates of 20%. To extend that metaphor, it equates to removing one of five digits from your hand.
Heel-dragging is a widespread and well-respected practice in business. Nobody gets paid before they do the job. The delay in getting paid – I have on occasion waited 90 days – is just money in their kitty.
The optimal strategy in the credit card contest is to have them constantly at the limit. That way your $10,000 remains constantly interest free.
If you think that’s a bad idea, get back to me in 50 years.