There’s been a lot of talk recently about taking advantage of 0% balance transfer credit card offers. When it comes to getting rid of credit card debt, the utility of these balance transfer offers is pretty obvious — simply tranfer balances from higher-rate cards to a 0% credit card and save a ton on interest while you pay off your debt.
Simple enough. But what if you don’t have any high-interest credit card debt? Can you still take advantage of these offers? As many of you already know, the answer is a resounding YES.
What follows is an outline of the steps involved in accessing the funds from a 0% balance transfer and using them to earn extra money (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 ING Direct which was recently acquired by Capital One 360 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.
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 rewards 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 a bunch of 0% introductory APR balance transfer credit card offers out there.
Just to get you started, a couple of my favorite 0% introductory APR balance transfer cards:
» Discover it
» Citi Simplicity Card
(If you’d like to look more widely, see my post on 0% credit card offers.)