One of the chief rules around personal finance is to get yourself out of credit card debt ASAP and that’s for good reason. Credit card debt is typically at a high interest rate for purchases that you probably don’t need on things and probably can’t sell for more than pennies on the dollar. In addition, the psychology of spending tomorrow’s money using today’s minimum monthly payment can be a pitfall for many people. Yet, I still chose to use a My Chase Plan that increased the balance on my credit cards and here’s why.
It was surprisingly cheap
The first thing that comes to mind when I hear the word credit card is high rates. It’s no secret that rates on credit cards are high; I expect that the best rates you might see are around 15% with most running between 20-25% APR. So, when I first tapped to get info on the My Chase Plan, my expectations were low. However, I was pleasantly surprised.
The My Chase Plan for $3700 worth of appliances provided the option to divide the single payment into 6 equal monthly payments with a monthly fee of $10. I did some quick back of the envelope (pardon the expression) calculations and reasoned that $60 in interest over the course of half a year came out to an annual rate of around 3.3%. Not bad.
It was really flexible and easy to use
The Chase My Plan allowed me to choose from a pay off period between three and twelve months with discounted monthly fees for the shorter pay off periods. In my case I knew that I’d close on a house in two months and that is when I’d schedule the appliance delivery. Between now and closing I wanted to have a little more liquidity for closing costs and moving costs without being forced to sell funds in my brokerage account. Choosing a pay off period gave me the power to commit to a minimum repayment time at a lower cost than I would otherwise pay on a credit card. Most importantly I tapped into my existing line of credit. There is no way I’d ever consider opening a new line of credit while closing on a house, but this gave me the flexibility without the same credit implications.
To be sure there wouldn’t be a change to my credit score, I used a score simulator provided by my bank. Without any other debts at the time, the score simulator showed the slightly higher utilization of 8% would have no effect on my credit score. Sweet!
Buy Now Pay Later services like Affirm, AfterPay, or PayPal offer similar services however, I did not initially plan to split up my purchase. The thought really only occurred after I saw the option from within the app. I almost certainly would not have used a My Chase Plan if I had to download another app or take an additional action at checkout. Given the nature of underwriting I would have rejected any use of a payment plan that required an answer at checkout. The risk to make a hasty decision that would impact my mortgage chances were too great.
The plan itself was also simple to understand. The monthly fee and principal repayment are both fixed and there is no penalty for early repayment of the balance. This gave me piece of mind knowing that I could bring my balance on my card to zero at any time should I need to.
Inflation was also a (small) consideration
Inflation slowly chips away at your buying power and today that rate is quicker. For every dollar you have today, that same dollar will buy fewer goods a year from now. So, if you can spend today’s dollars and repay today’s dollars with future dollars then you’ll be better off than you otherwise would be.
The key is to consider the real or effective interest rate, that is the rate that accounts for the change in price levels. For example, if a savings account earns 2% interest but inflation increases by 3% then a year from now you will only be able 99 Big Macs for every 100 Big Macs you could previously buy. This is true even though the actual number in your account, nominal dollars, went up. Therefore, with inflation running 6.8% in November, any rate below 6.8% would actually leave me better off than paying with today’s dollars. This is the same reason why holders of student loan debt are better off than they were two years ago.
Find more statistics at Statista
I’ve spent plenty of time looking at why I used a My Chase Plan, but you might have noticed that my initial cost estimate ignored a crucial detail. My back of the envelope calculation made a simplifying assumption that the balance remained unchanged until I repaid the full $3700 plus $60 in monthly fees in six months from now, but that’s not how the My Chase Plan works. The plan is six even payments with a fixed fee each month. This means that my later payments incur the same monthly fee even though the remaining balance is lower. This means that the effective rate is higher the longer I maintain the plan. But how much higher?
To figure this out I calculated the return for a series of cash flows for each of the possible scenarios. Since there was no prepayment penalty, I have a choice each month to pay the remaining balance. Included in my choices is the choice to pay the entire balance within one month of my statement date so that I don’t incur any interest or fees. Here’s a table of my findings:
I expected an increase but was still surprised to see that the effective rate over the length of the plan was 9.5%. After doing the calculation it was difficult to justify delaying early pay off past two months. With the inflation levels I could justify paying off the balance in as long as four months since inflation had been 6.8% in November, but months five and six represent a real borrowing cost rather than simply a nominal cost.
The negative real rates I evaluated for My Chase Plan are similar to the dynamics for student loan repayment plans [link-internal]. Why pay down debt when you are borrowing at a negative real interest rate?
My Chase Plan Pros
- Choice of plan lengths
- Activated directly from your transaction history
- Easy to compare plans of different length
- Lower cost than maintaining a balance
- No early payment penalty
My Chase Plan Cons
- Effective interest rate might be higher than you think
- Potential to accumulate debt
My Chase Plan Use Cases
One of the main use cases I see for using a flexible payment plan like the My Chase Plan/AmEx Pay It Plan/Citi Flex Pay is to take the discount offered by other financial services and utilities to prepay six months to a year of service at a time. For example
- Car Insurance – Some car insurance providers like Geico will offer 10-15% off your premiums if you prepay the six months at the beginning of your coverage. If you’re not quite able or ready to pay six months of premiums up front, then you could use a flex payment plan through your bank to receive the discount. This could make sense if the insurance company would charge you more for paying monthly than your bank would
- Prepaid Cell Phone Plans – One barrier to saving money on a cell plan by paying for a year’s worth of service upfront is the high cost associated with paying for a year’s worth of phone bills. But if you can pay off a year’s worth of prepaid cell service over 3-6 months then you might be more likely to opt for the lower cost option and save some money in the process.
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