(I'm also known as a person who can squeeze a penny till Lincoln squeals, but that's another story.)
Anyway, this person, we'll call him Ron, said that he needed money to move, but didn't have any saved. He said that he had a plan to get the money and wanted my opinion of his plan.
Ron had been mailed one of those "0% APR for 6 months" credit card offers and thought that he would take out a signature (or personal) loan from a local finance company to pay for his move, then use the "0% APR for 6 months" credit card to pay off the signature loan.
The local finance company was charging 28% APR for a signature loan, but Ron figured he could pay it off as soon as he got the "0% APR for 6 months" credit card in the mail. His thinking was that he would end up paying no or very little interest on the whole deal.
He wanted to know if this would hurt his credit and if I thought it was a good idea. I didn't think it was a good idea.
- My first thought was, "I don't think your credit card application will be approved once they run your credit history and find a new signature loan in your credit report." Signature loans are often considered "high risk loans" because of their high interest rates and high frequency of default (Top 7 Ways to Improve Your Credit Score-Play by the Rules).
- Hard credit inquiries hurt (lower) your overall credit score and he was going to add two hard inquiries in less than a month (How Credit Scores are Calculated-Interest in obtaining new credit).
- The Credit Card company may not offer a way to pay off the signature loan other than a Cash Advance, which may not be included in the 0% introductory offer. And, a cash advance may incur interest as high as 30% APR.
- If Ron makes just one payment late, that 0% APR skyrockets to the Default interest rate, which can be much higher than the normal (non-default) APR.
- Using a Credit Card to pay off a Signature Loan is a dangerous juggling act that will fall apart with one mis-step. If Ron takes out a Signature Loan first, then finds that he can't get the"0% APR for 6 months" credit card, he will be paying 28% in interest throughout the life of the loan.
So, lowering his credit score by adding two hard inquiries, taking a chance that one of the credit applications may be turned down, risking the possiblity of having to pay a cash advance rate on the credit card, and the risk of making a mistake or making one late payment, means that if one thing goes wrong, Ron will go from struggling to save money to drowning in debt.
In my opinion, the risks in this plan are just too high.