Credit Card Tactics: Making Free Money From Balance Transfer Offers - Part I
Many smart folks save money by taking advantage of credit card companies balance transfer offers. With balance transfers, a card holder is looking to transfer a credit card balance with a high interest rate to another card that offers a juicy low interest rate or, in many cases, a 0% annual percentage rate during the promotional rate period. Before the teaser rate expires, our card holder pays off the balance transfer amount and saves money on the interest he or she would have paid on the old high interest rate card. But there are some very savvy credit card holders who have taken this practice to another level. They have figured out how to make a profit using the credit card company's money every time they do a 0% APR balance transfer. If done right, balance transfer arbitrage amounts to free money from something you would have to do in the first place - pay your credit card bill.
How It Works
If the balance transfer offer is a good one, Mr. or Ms. Smart Card Holder has the credit card company issue a check payable to them instead of immediately paying off the old credit card balance The card holder then deposits the money into a high yield savings account or a high yield money market account. Using the credit card company's money, our credit card holder makes the minimum credit card payment due. Prior to the expiration of the low rate offer, the person pays off the new credit card balance with the funds on deposit in the high yield savings account or money market account and keeps the interest earned on the entire amount deposited. The profit is the spread between the interest earned on the balance transfer amount in the high yield savings or money market account and the payoff amount less the fees, if any, on the balance transfer. What if you don't have a balance on your credit card? If you have a car loan, student loan, personal loan or home equity line of credit, you may be able to transfer the balance to your
new credit card. Even if you have no debt at all, you can still make money from this credit card tactic. Let's say you were able to borrow $25,000 at 0% APR for a year and CitiBank is paying you 5% interest for the year on that $25,000, that's $1,250 for the year. Its not enough to make you rich, but its nothing to sneeze at either.
Learn The Game Before You Leap
Now before you start sifting through credit card solicitations in the junk mail or google "balance transfer offers", you really need to know the game. The first thing you need to understand is that balance transfer arbitrage is not for everyone. There are pitfalls to this credit card strategy and if you are not careful, it can backfire on you. If you have a negative credit history, if you are the type who "forgets" to pay their bills on time, if you shopping for a mortgage or an auto loan, you may need to take a pass on this strategy. Also, this may not be for you if you regularly carry a balance on your credit cards. Forget about the marketing piece you received in the mail or reviewed online. The meat, what you really need to know about the offer, can be found in the terms & conditions - only through a thorough analysis of the terms & conditions can you determine whether or not a balance transfer offer is a good deal.
In Part II of this article, we will detail what you need to look at in evaluating balance transfer offers.
Ray Harris writes articles on credit, investments and personal finance. He is the webmaster of a website that provides information on a variety of credit card offers, including balance transfer offers.
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