Money Angles

By Andrew Tobias

Before I tell you the two cardinal rules of plastic, I've got to tell you about this little gimmick. I'm a fan of AT&T, so I have mixed feelings about revealing it. But until they close the loophole, how can I resist? It wasn't my idea; it comes from Denny Cunningham, a sharp-eyed user of my computer program. And it's this simple: if you have an AT&T Universal MasterCard, as 11 million of us do, and if you pay your balance in full each month, there's no interest charge on cash advances. Just a 2.5% service charge, with a minimum of $2 and a maximum of $20.

At first blush, this may seem no bargain, and on normal transactions it's not. But here's the deal. The ATMS limit you to $400, but by going into a bank that honors MasterCard, as most do, you can grab a cash advance equal to your entire available credit. From a human teller (remember them?). Because of the $20 cap, that 2.5% maxes out at $800. Borrow more, and the effective percentage you pay begins to fall. Say you borrow $2,000. The charge is still $20, which works out to 1%. Borrow $10,000, if your credit limit is that high, and you still pay just $20. (At least until someone at AT&T reads this and changes the rules.)

Now, to borrow $10,000 for a month for $20 is to be paying only two-tenths of 1%, or about 2.4% annualized. That's less than Uncle Sam pays to borrow. And if you take the advance the day after the previous billing cycle closes, you can wind up holding on to that $10,000 for nearly two months without incurring interest. All for $20. In that case, the effective annual rate you're paying is less than 1.5%. Switzerland can't borrow that cheaply!

Of course, in terms of actual dollars, this is no way to get rich. Especially when you factor in the time it takes to keep track of it and the ( risk that one day you'll fail to pay off your balance in time and start racking up interest charges. There is also the small matter of what to do with this cheap money once you've borrowed it. Hmmm. You could use it to pay down some higher-interest credit line, at least temporarily, and save a little money that way. You could invest it in whatever you plan to do with your tax refund, only a month early. Or maybe you'd just enjoy seeing the money in your checking account earning enough interest to cover the $20 service charge and impressing both the bank and AT&T with the size of the sums you can responsibly handle. In short: there's probably nothing of any great value you can do with the money, but it's still fun to borrow at 4 points under prime.

Happily, the past couple of years have seen many credit-card rates fall. If the rate you pay remains high, call the issuer and ask for a lower rate or to have the annual fee waived -- or both. Believe it or not, many credit-card issuers will do this rather than lose you to a lower-priced competitor.

But don't for a moment think that borrowing at 11.9%, say, is a good deal when your savings are earning 2%. Yet that's what the majority of credit-card holders do. They pay a non-tax-deductible 11.9%, or even 18%, on their cards and earn a taxable 3% on their savings.

Citicorp, the nation's largest card issuer, reports a surge of credit-card borrowing this holiday season. Maybe some of it was yours. But the first rule of personal finance (after Never Invest in Anything That Eats or Needs Repairing) is: Use Your Credit Card Only for Convenience, Never as a Plastic Loan Shark.

Rule No. 2: Don't Pay to Use Your Credit Card -- Let Them Pay You. Since from now on you will be paying off your balances in full each month, you won't have to worry about the interest rate the card charges. Instead, you can worry about what goodies you'll get for using it. Frequent-flyer miles can be worth 2 cents to 5 cents each these days, so the cards that give you a mile for each dollar charged are actually giving you a 2% to 5% discount. Before, everything you bought was costing you 18% extra in credit-card interest. Now, because you're paying off all balances in full at the end of each month (even if you had to sell 50 shares in United Gizmo to do it), everything's 2% to 5% off!

Or if you tend to buy your cars new rather than used, get one of those GM or Ford cards that give you 5% credit toward your next purchase. Or a Discover % Card that gives you a small but real cash rebate at the end of the year. They're giving money away -- get something. But remember: the key to it all is to pay your balance in full at the end of each month. If you can't do that -- and it ain't easy -- cut up the card.

Let this New Year's revelation inspire a New Year's resolution and, with it, your own small financial revolution.