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Pitfalls of Using 0% Credit Card Offers To Earn Interest

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I’m sure a lot of you folks read Fatwallet Finance, the finance focused board on the Fatwallet site, and have considered doing the 0% balance transfer “deal.” The strategy even hit mainstream on CNNMoney in an article about some “millionaires” in the making. (CNNMoney Story, 2/7/05) If you have a mailing address, I’m sure you’ve received an offer of some kind from credit card XYZ to take some money for 6 to 12 months interest free. Then, you take the cash and put it into a very safe ING or Emigrant Direct account where it earns 3%. On paper, this plan looks incredible. You can get some free money for doing very very little… but there are pitfalls that I believe many are overlooking and those pitfalls are where credit card companies will fleece you without any hint of remorse.

Pitfall #1: You don’t own a home yet but plan on one relatively soon (or another capital purchase).
When you apply for the offer, you’re going to take a hit on your credit history in the form of an inquiry. If you are approved and take out this “loan,” your score will once again take a hit as your gross debt amount will rise and your utilization will increase, mostly likely considerably. If you need to open an Emigrant Direct or ING account to get the favorable interest rate, they will also make an inquiry that will affect your score. Considering that your credit score could mean thousands of dollars in interest over the life of a loan, is the couple hundred you’d make (if you were to secure $10,000 in credit debt) really worth the damage (albeit short term) to your score?

Pitfall #2: Read the fine print for actual 0% eligibility.
If you read the fine print for many cards, your new purchases (after the 0% balance transfer) will accrue interest at the actual interest rate of the card, not at 0%. And when you make additional payments, you are paying down the balance transfer amounts and not the newly charged amounts. What this means is that if your regular interest rate is say 20% (for round number’s sake), if you spend $100 this month and have $10,000 in balance transfer debt… you will have to pay $20 each year in interest on the $100 until you clear out the balance transfer. Don’t pay attention and this will add up. Some of these balance transfer offers require two charges per month! That ensures the card makes money (Discover requires this).

Pitfall #3: You might forget a payment.
If you miss a payment, the credit card company is permitted (another fine print bullet point) to jack up the rates to almost whatever they want. Can you imagine 20% on a $10,000 balance? That’s over $150 a month if you aren’t paying attention. Hopefully you are but if you missed a payment, who knows what else you missed. Miss it once, pay the interest once before you can pull out the amount from ING, and you’ve killed half of your projected annual return in one shot. Plus, you pay taxes on the ING interest (you’ll be 1099-INT’d) but you can’t deduct the credit card interest. That’s a double whammy come April 15th.

Pitfall #4: Unless you’re absolutely serious, you’re not really making enough money to really be worth it.
With a balance transfer of $10,000, you’re talking $300 a year. For lots of people, that’s not worth it after you take out taxes and consider the hassle. At $60,000, you’re starting to talk about close to $2000, which for many (including myself) is an amount that makes the scheme worth it. Do you want $60,000 in credit card debt smiling at you?

Pitfall #5: You lack the discipline to keep the cash in ING.
Listen, $10,000 is small potatoes for this type of scheme as I mentioned before… but jack that up to $60,000. Screw ING, put $60k in a mutual fund or index fund – historical 11% return crushes guaranteed 3%. Let’s do it! But what if the market tanks… you will file for bankruptcy and ruin your financial future for quite some time. You also then fall under the new bankruptcy laws, ones that don’t look favorably on credit card debt.

Bottom Line: The scheme is creative and very profitable. But for some, it’s just not a smart financial move given their circumstances and their personality. I think that when these types of schemes get exposure on sites like Fatwallet or CNNMoney, the pitfalls are overlooked in favor of highlighting the “get-rich-quick” aspect. Will this scheme give you free money will relatively little risk? Yes. But the risks and the potential pitfalls still need to get as much attention as the interest checks.

{ 6 comments, please add your thoughts now! }

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6 Responses to “Pitfalls of Using 0% Credit Card Offers To Earn Interest”

  1. Tim says:

    You make some good points. When I first read about it I thought it was kind of crazy. There are definite drawbacks. I think the one about dropping your credit score is probably not a huge issue for most people. If they were worried about that they should apply for the card in the first place. Anyway, interesting read. And since you’re going to try it now…good luck!

  2. Tina says:

    Making money off )% offers is worth the effort. Here are my responses to the aforementioned “pitfalls”.

    Pitfall #1: You don’t own a home yet but plan on one relatively soon (or another capital purchase).
    As a homeowner with a fixed mortgage intact, and cars paid off, this is not applicable. True if you are in the market shortly.
    Pitfall #2: Read the fine print for actual 0% eligibility.
    Solution – Use the card only for the 0% loan, not for further purchases.
    Pitfall #3: You might forget a payment.
    LOL. Seriously, setup automatic payments.
    Pitfall #4: Unless you’re absolutely serious, you’re not really making enough money to really be worth it.
    Hmmm.. Free money is free money no matter what the amount.
    Pitfall #5: You lack the discipline to keep the cash in ING.
    Huh? Just open a CD – “Autodiscipline”.

    You Betcha I use those 0% CHECKS I get in the mail. Here’s my setup:

    40K – My own cash
    19.3K – Chase Mastercard
    20K – Discovercard
    24.4K – MBNA Card
    12K – AT&T Universal Card

    Total: $115700

    Most checks are like cash advances, and are good for a time period of 3 ~ 12 months. To keep it safe I run 3 month CD cycles. I simply write them out to ETRADE BANK From there its a snap to open up a CD (currently 5% for 3 months!!). The one I just completed netted over $1400, in only 3 months!! And I’ll just continue this over and over and over….

    Minimum payments close to $600/mo – must have that in mind.
    Credit Score maybe affected, but with my cars paid and mortgage doing fine, don’t see a problem.
    Fees total $200 from using the checks.
    Have a usable CC for real purchases – I use a Citicard Rewards for day to day purchases.

    Bottom Line: Is it worth it? Pays my property taxes and vacations. I’d say yes.

    • kathleen van sandt says:

      Thanks for your comments on the Pitfalls mentioned….I can’t do the 0% CCthing yet because I need to re-finance in December, however, my naive question is, how do you get the money off the piece of plasticd into an account with hi yield? Is it like a cash advance, which is quite expensive?


      What are the actual mechanics you do? And do you repeat this with different cards every year?

  3. mogando says:

    here’s my setup :

    Chase – 28K
    BofA – 37K
    Amex – 78K

    Total – 143K

    Total fee = 75 (BoA) + 99 (Chase) + 0 (Amex) = $174 (0.12%)

    First month interest at 5.10% APY = $608

    Net profit after 1 month = 434

  4. leticia says:

    can anyone tell me if a credit card company can charge you interest on a deffered interest? example: you have 0% interest for 6mths, you send in the last payment for the full amount late, your charged the full interest amount on the loan. can they charge interest on the outstading interest?

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