2.99% fixed rate credit card loans at Pentagon Federal Credit Union: Take that Credit Crunch!

From time to time, www.rethinkingmoney.com will review financial products and services that we think offer exceptional opportunities to our readers. The first in this series covers an offer announced in May 2008 by  Pentagon Federal Credit Union.
 
The offer in a nutshell. Until June 15 2008, any credit or loan balance transferred to any Pentagon Federal credit card will qualify for a 2.99% interest rate until the balance is paid off. Other than a one-time, 1% transfer fee with a $10 minimum and $100 maximum, there are no catches to this offer.

Why is this a good deal?

• Very cheap fixed-rate debt. 2.99% is an amazingly low fixed rate. We're not aware of any lower rates anywhere, outside of introductory promotions or offers targeted to particular customers. Even the best secured loans—which all require real estate, vehicles, stocks, or other property for collateral—will charge significantly more than this.
• Very reasonable fees. As long as the transfer is at least $1,000, Penfed charges only a one percent fee. Even better, due to its $100 cap, the fee is lower still if your situation allows for a transfer of over $10,000.1
• It comes at a great time for credit customers. As the “credit crunch” continues to unfold, many lenders have been curbing credit of all kinds: home equity loans, small business lending, and general credit card limits as well as promotional offers like this one. We at www.rethinkingmoney.com suspect that this pullback in credit offerings will get worse—perhaps much worse—before it gets better. That makes now a great time to lock-in low-interest, no-obligation debt.
• A membership and product worth having on other grounds. PenFed is arguably the best credit union in the United States offering membership to everyone. It's well worth joining, even if you or a family member has to pony up the $20 one-time fee to gain admittance. And their flagship card product, the Visa Platinum Cash Rewards Card, is among the very best credit cards available, with perhaps the simplest rewards structure in the industry. Especially noteworthy is how forgiving they are about late payments. According to their representatives, cardholders are granted ten days grace period before they incur any late fee, and they not in “default” (thereby losing a the 2.99% rate) until they are sixty days late. Even if they DO default, the rate increases to 14%. While much worse than 2.99%, this is far better than most any other credit card company's default rate.

 
How can deal this help me? Here are a few examples of how this offer might be used prudently:

• Pay off higher rate credit card debt. This is no doubt what most PenFed members who take advantage of the offer use it for. Suppose you have $15,000 in credit card debt at a 15 per cent interest rate. Simply transferring that debt to this card will save $50 the first month (including the transfer fee), and over $100 each additional month for years going forward.
• Pay off a vehicle loan. Car loans will always be set at higher than 3% interest. Moreover, they require the car as security, which among other issues means that the car's owner must carry “comprehensive” insurance sufficient to pay off the lender. By using this offer to pay off a car loan, you not only get title to your vehicle back and save on interest, but you also might save a bundle on insurance payments.
• Generate a cost-free “cash cushion” or “emergency savings account”. Even if you don't need the money now, this rate is so low that a borrower likely won't lose money by simply taking the proceeds and saving them in a safe vehicle like a CD or a money market account. (Indeed, Penfed's own five-year CDs currently pay 4.41%, or almost 50% more than this debt costs!) And by doing so, you instantly create a “reserve account” that could be tapped in the event of an emergency, in lieu of borrowing at whatever rate you might find.
• Top Off that Retirement account contribution. Ideally, all of us workers would be investing substantially in our retirement accounts regardless of this offer. But for some, a promotion like this will make the difference between enjoying the full 401(k) “matching dollars” that their employer provides, or making a full Roth IRA contribution for that year.
   

How do I set this up?

• Becoming a member of Pentagon Federal. If you aren't one already, here's how to join. Virtually anyone can join Pentagon Federal. Membership qualification options include one that admits essentially anyone willing to to pay a one-time, $20 fee.
• Getting the card. The first step is Once that's done, simply long in to their online banking system and fill out online application, or call them 24/7 to apply.
• Performing the transfer. Once that's done, you have until June 15 to initiate a balance transfer online or by phone to any other lender. Note that this rate requires that PenFed send the money to the other loan account, not a deposit or checking account. If you happen to have a higher-rate balance you want to pay off, this won't be an issue. If not, you might transfer to a line from which cash can easily be drawn without a fee, such as an equity line of credit, or a credit card with no cash advance fees.
• Making Payments. Payments can easily be made online, by phone, or by mail, and their online system is quite flexible. They also do have a useful “auto-payment” setting that can make sure that payments are never late, provided that you have funds in a payment account sufficient to cover that month's minimum.

 Any other details I need to know? There are a few worth noting:

• This offer is good for ALL cardholders, new and existing. Frequently, offers like this are either reserved for new cardholders, or targeted only to certain customers. Not this one.
• Credit lines run up to fifty thousand dollars per person. With good credit, many members are awarded $25-50,000 lines, often without having to provide financial documentation. And unlike at some credit unions, these limits are per person, not per household. So it's entirely possible—and not that uncommon—for a husband and wife to have $100,000 in credit card limits between them.
• Minimum payments are 2% of the balance. If you haven't used a balance transfer offer before, this detail might not seem significant. But if you think of this offer as a super-low-interest “loan”, it's this payment statistic that dictates the loan's “term.” That is, the lower the monthly minimum payment required, the longer the offer will benefit you, and the greater the interest saved. Specifically, this loan's balance gets reduced by half roughly every 39 months.2
• Don't plan on using the card for purchases while the balance transfer is active. As when carrying any balance, this offer negates the "grace period" on new purchases, and as a result any purchase will accrue interest at PenFed's standard "purchase rate" of 13.99%.  Moreover, subsequent payments will apply to higher rate  balances (e.g., the $13.99% purchases) before lower rates balances (the 2.99% for life offer in this case). Bottom line: while using this offer, use this Penfed card it only for this offer.
• PenFed transfers electronically where possible, and by check where not, posting them immediately either way. Their electronic transfers are amazingly fast, often reaching the target account within one to two business days! However, mailed paper checks are much less reliable, and can take weeks. Either way, interest accrues effective the date you make the transfer, so it's to your advantage to have the delivery of the funds be as rapid as possible.

Notes: 
1. Simple arithmetic shows that as the size of the transfer increases above $10,000, the fee will drop below one percent, down to a theoretical minimum of 0.2% for a $50,000 transfer. Since fees are per transfer, you will want to make one larger transfer rather than several smaller ones. An exception: if you want to transfer between 2,000 and 10,000, your fees may not be greater if the transfers are divided. Example: if I can transfer $8,000, then sending $2,000 to card A, $2,500 to card B, and $3500 to loan C, I'll pay $20 + $25 + $35 = $80 in fees; the same $80 that a single $8,000 transaction would cost.

2. During the first 39 months, and initial balance of $50,000 would be cut to $25,000. Then 39 months later, that $25,000 becomes $12,500. Borrowing from physics, one might think of 39 months as the offer's “half-life”. Meanwhile, the payments start very large---$1,000 a month at the beginning—but they fall just as rapidly as the principal balance does.