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Tempted To Put It On Plastic?

In an effort to lure new customers, credit card companies are offering some lucky people "free money" - a $20,000 cash advance, interest-free for six months or more.

Don't act too quickly, The Early Show financial adviser Ray Martin warns. In a visit to The Early Show Thursday, he has the lowdown on this credit temptation.

He will talk about how it affects your FICO score, what that score measures, how it is determined and how you can get a copy of yours.

It's not often that one receives an offer in the mail for $20,000. But if you're in the habit of chucking credit card offers, you might want to start taking a peek inside those envelopes. You just may find an offer for a large, zero-percent interest cash advance. This is a big departure from the high rates companies have typically slapped on cash advances

The companies are hoping people will find the deal too good to pass up; they want to attract new customers and boost lending. According to The Wall Street Journal, "The new deals are part of a broader effort by banks to boost their consumer lending even as their commercial business slumps. By encouraging customers to rack up big balances, banks hope to insulate themselves from any future slowdown in consumer spending ..."

Of course, they also figure that most borrowers won't repay the cash advance before the zero percent offer ends and will pay interest for years to come.

These offers do not appear on credit Web sites or in other advertisements; they only come through the mail. That's because card companies are targeting individuals with squeaky-clean credit records and above-average incomes. However, anyone who wants in on the action can call the companies themselves and request a deal.

Of course, there are some strings attached to these "free money" offers.

"Although the offers don't mention it, you'll have to make minimum monthly payments of one percent to three percent of the advance," Martin says. "Be late with one of these and the free interest deal is off."

While the cash advance might have a great rate, this zero percent does not apply to purchases made with the card, which can range from 13 to 18 percent. Finally, many of the cards require a one-time, up front fee of around $50.

These caveats shouldn't necessarily scare you away. As a matter of fact, if you're smart, you can actually make money by accepting the companies' deals.

The following are Martin's suggestions for doing just this:

Buy a CD: "Take the free cash and buy a Certificate of Deposit that matures just before the no-interest period is set to expire," he says. "The best rate on a CD may come from your local bank, but I shopped around and found 2.41 percent on a CD maturing March 3, 2003, issued by First Commercial Bank of Huntsville. Invest $20,000 in this CD, and you'll make $200 in five months. Get the money back when the CD matures and pay back the cash advance."

Pay off credit cards: "Suppose you have a balance of $20,000 on a credit card at 18 percent interest," Martin says. "You could take the six-month, no-interest cash advance, pay off the old credit card debt and gain an interest holiday of six months. This would save you over $1,800. Use the monthly savings to pay down the balance of the cash advance."

Increase your home's value: This is a good option if you want to make some home improvements but aren't sure your home's value is high enough to justify a home equity loan. "Use the no-interest cash advance to finance a home improvement," Martin says. "When the work is done, apply for a home equity loan based on the home's improved value. Use the lower rate and tax deductible home equity loan to pay off the cash advance before the no-interest period ends."

This all sounds good so far but consumers must be committed to repaying the advance in the allotted time. Otherwise, the money made will quickly be eaten by high interest rates.

Clearly, people who will be unable to pay back the $20,000 within six months should not succumb to this credit temptation. Even if you can afford it, Martin says that anyone looking to apply for a new job or mortgage within six months should stay away from these offers because the move can hurt your FICO score.

What is FICO

FICO is the credit score most widely used by banks and commercial lenders. FAIR, ISAAC and Company pioneered the technology for credit scores in the late 1950s and this model remains the most popular today. The company claims at least three-quarters of all mortgage decisions use the FICO score, as do 23 of the largest 25 credit-card issuers and 40 of the 50 largest financial services institutions.

Until recently, FICO scores were a big secret. Consumers were not allowed to know what it was or even exactly how it was determined the score.
TheStreet.com reported: "( FAIR, ISAAC) fought disclosing information about FICO scores on grounds that consumers would know too much about how they're computed and would be able to artificially manipulate them."

Now however, consumers have a better idea of what factors comprise their FICO scores. Here's the breakdown: (as explained in the Sun-Sentinel)

  • Payment History: 35 percent - It's the main thing that lenders look at. If you pay bills late, had an account sent to collection, or declared bankruptcy, your score is negatively affected. The more recent the problem, the lower the score.
  • Outstanding Debt: 30 percent - This considers how much you owe on credit and whether you could overextend yourself with too many credit cards.
  • Length Of Credit History: 1 percent - How long have your accounts been established? What's the average age of all your accounts?
  • Recent Inquiries On Your Report: 10 percent - Applied for a lot of accounts lately? That could impact your score.

    Types Of Credit In Use: 10 percent - Finance company loans generally lower your score.

Looking at these factors, it's easy to understand why Martin advises against the credit card offers if you're in the market for a job or mortgage. The card would be new, there would be o history of payments, and the cash advance could push your outstanding debt to the max, serving to lower your FICO score.

The scores are calculated daily so accepting one of the new offers will impact you immediately; this lower score is what a lender or employer will see. Not convinced that this a big deal? Take a look at the example posted on myfico.com of rates for a 30-year fixed mortgage, based on FICO scores.

FICO Score       Mortgage Rate
500-559              8.740
560-619              8.573
620-674              7.743
675-699              6.593
700-719              6.056
720-850              5.931

FICO scores range from 300 to 850. In general, anyone with a score in the mid-to-high 600s and above is looked upon favorably. As you can see, once you hit 720 lenders assume you are a safe bet, you don't benefit much by having 800 or 850 instead.

If you want a copy of your score, it will cost you $12.95 at www.myfico.com.

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