I just ran across an interesting post from Samerwriter. It seems that after seeing my post on 0% balance transfer credit card card offers, he applied for a couple of cards to take advantage of the ‘spread’ in interest rates — 0% on the credit card debt and a bit over 5% (less after taxes) from a high yield bank or money market account. It seems that Samerwriter hopes to engage in $50k of credit card arbitrage this year — assuming a 3.5% after tax return, that’s a (relatively) risk-free profit of $1, 750/year ($150/month). Not bad. So what does he have planned?
Well, so far he’s applied for two 0% credit card offers:
1. Discover More
2. Citi Home Rebate MasterCard
Both cards have no annual fee.
He was approved for a $25k limit on the Discover More card, but just $4, 200 on the Citi Home Rebate MasterCard. However, after a bit of finagling, he was able to get that bumped to $25k.
Next up, getting the money…
Citi simply lets you request a balance transfer check, made out to you, which can be deposited directly in your bank. Easy peasy. Discover, on the other hand, is a bit less convenient. When they wouldn’t cut him a check, he transferred $25k from his Chase Amazon Visa which had no balance. He now has a 0% balance of $25k on his Discover More and a $25k credit from Chase — now all he has to do to get his hands on the cash is request a refund of his credit balance to access. Nice.
It’ll be interesting to see how this develops. If you’d like to play along, here’s a list of some of my favority 0% balance transfer credit cards:
What follows is an outline of the steps involved in accessing the funds from a 0% balance transfer and using them for personal profit (so-called credit card arbitrage) or savings (e.g., saving on your HELOC), as the case may be. At the very end, I’ve also included a list of some of the best balance transfer credit cards for playing these sorts of games.
Getting Your Hands on the Money:
The easiest way to access your 0% credit line is to request a balance transfer check from the credit issuer, and then simply deposit it in the bank. Citi is probably the easiest in this regard. I’ve also heard that you can get balance transfer checks from Chase, though I can’t say for certain that this is the case.
The alternative is a bit more creative, but still doable for pretty much any card issuer. If you can’t get the money straightaway, you’ll need another credit card (let’s call it Card #1). The good news is that this card doesn’t need to have an outstanding balance (in fact, you don’t want it to have a balance). When you apply for you 0% balance transfer credit card (Card #2), simply request a balance transfer from Card #1 to Card #2. This causes the issuer of Card #2 to make a payment against Card #1, creating a negative (credit) balance. The next step is to request a credit balance refund. In some cases (e.g., you used Citi for Card #1), you can do this online. In other cases (e.g., AmEx as Card #1) you may have to call to make your request.
Once you get your balance transfer check or your credit balance refund, you’re ready to roll…
Making (or Saving) Money With Your Balance Transfer Funds:
As with getting your hands on the money, there are a couple of ways you can go here… First, you can simply deposit the funds in a high-yield savings account, where you can easily pull down up to 5% APY (or more). The earnings from the account (minus taxes) represent your profits — be sure to avoid fees (below) if you want to maximize your return. My personal favorites in the online banking realm are Capital One 360 (who recently acquired ING Direct) and HSBC Direct.
Second, you can use your balance transfer to offset existing debts. Simply transfer high interest credit card balances to your 0% card and they work to pay them off like there’s no tomorrow. If you don’t kill off the debt before the offer expires, apply for a new 0% offer, transfer the balance again, and keep pushing. Alternatively, you can use the money to pay off secured debts — car loans, your HELOC, etc. Simply sock the money into your
In these latter cases, your profit comes in the form of savings on interest that you would have otherwise been paying.
Things to Look Out For:
The biggest gotcha when it comes to balance transfers is fees. Many card issuers charge a balance transfer fee (typically in the ballpark of 3% of the amount transferred) whereas others don’t. Obviously, if you’re looking to maximize the value of your balance transfer, you’ll want to avoid fees. The good news is that there are a number of fee-free balance transfer options, as well as others that normally have a fee, but waive it for new applications. Check the list at the end for some great no-fee options.
Maintaining the System:
Here’s where you need to be careful… Most, if not all, 0% offers are contingent on you playing by the rules, not the least of which is paying the minimum amount due on time each and every month. Slip up and the interest rates can rebound to their normal levels. So read the terms carefully, and be sure to follow all of the rules.
The Downside:
Aside from running the risk that you might mess up and miss a payment, the biggest downside to this scheme is the possible negative impact that it can have on your credit rating (i.e., FICO score). As you may or may not know, credit utilization (the percent of your available credit that is currently tied up) is a major component of your credit score, and maxing out one or more 0% credit lines can pump up your utilization.
As with all ratios, you can reduce your credit utilization in one of two ways. First, you can borrow less. Second, you can increase your available credit. Obviously, the former is somewhat antithetical to the idea of profiting by borrowing a bunch of money at favorable rates. That being said, it’s also important to keep in mind that you likely have other credit cards lying around that you won’t be using for your 0% games. To the extent that you don’t run up charges on these cards, they’ll help offset the heavy usage of your other cards. This positive effect on utilization is one of the reasons that you shouldn’t cancel old credit card accounts (the other reason is that credit scores are also influence by the average age of your accounts — the older the better).
Your Card Options:
Even though interest rates have rebounded from their historic lows, there are still offers out there for 0% credit cards. Just to get you started see my post on 0% credit card offers that may fit the bill while minimizing expenses.
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Joel said, “Of course, you must never use the card once you get the balance transfered in”
That’s not always true. I’m doing this now with a Miles reward card from Discover, and the 0% APR offer applies to both balance transfers AND purchases. In fact, if I make at least one purchase during each billing cycle, I get a bonus 1,000 miles/month.
But with most of these offers, you’re right. If you make a purchase, they’ll charge you that high interest rate on it… and they’ll apply your payments to the LOWER APR balance (your balance transfer money) FIRST. It stinks, but it’s how they make their money…
I have the minimum payment made automatically from my checking account.
Of course, you must never use the card once you get the balance transfered in
great list. I’m writing about this 0% apr BT game right now.
I recently did the same thing with a new AmEx offered by USAA. I borrowed $12k at 0% for 12 months.
As Blaine points out, it could be easy to make a costly mistake though. As long as I pay the 2% minimum every month and pay off the balance at the end of the 12 (or transfer it, as I will probably do) I’ll be alright.
I don’t expect the 5%+ rates in savings accounts to last much longer, and having that much credit debt that could shoot up without me noticing because somebody makes a mistake in another account of mine is more risk than I’d be willing to take at this point in my life.