Credit Cards: Get You In, Keep You In, Keep You Spending

Credit card companies have three objectives in mind: Sign you up, don’t let you quit, and keep you spending. They make money whenever you spend and, in fact, they can make a ton of money if you never pay a fee, are never late, and never pay interest because they take a little cut off the top of each transaction. All the other fees and interest, that stuff is just gravy to them. So, when it comes to those three objectives, those credit card companies will employ all sorts of tactics to get you in, keep you in, and keep you spending (sounds like casinos doesn’t it!?) so keep on reading to see what I think is the best way to combat these tactics.

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0% Balance Transfer Credit Card Offer Daredevils

Hmmmm… according to an MSN Money article, Bruce of Virginia has $50k in credit card debt that has netted him thousands of dollars in interested because of 0% APR balance transfer credit card offers socked away into high yield savings accounts, taking advantage of something that personal finance bloggers have been writing about for years now. Now, it makes you kind of wonder about the whole 0% balance transfer arbitrage game now that it’s hit “mainstream” with articles in MSN Money, tipped off probably on Weston’s Your Money forums, but credit card companies still offer them, often times with no fees.

Only recently did Discover add a balance transfer fee to their transfers, likely because a lot of folks were targeting Discover before Citi, the other balance transfer target; and so you wonder if the free money will come to an end?

Personally, I think the balance transfer arbitrage game is too risky and not really worth the effort (do you really want to have $50k in credit card debt, even if you’re making money?) so I stopped after my first round of offers. However, if you really do want some extra spending money and I don’t mind the hassle, it’s definitely an easy way to make some extra scratch and the steps are pretty straightforward.


No Fee 0% Balance Transfers from Citi Ending?

I received a notice in the mail yesterday from Citi stating that they would start charging balance transfer fees of 3% with no maximum ($5 minimum) starting April 3rd. Some Fatwalleters have reported getting these as well. The notice itself stated that this would be effective on the cards I already have so there’s no information as to whether no fee 0% balance transfers (and thus the balance transfer arbitraging that many people are now doing) is coming to an end but it’s certainly an ominous notice to be getting in the mail.

So, if you’ve thought about doing the balance transfer arbitrage thing, I’d get on it because the opportunity might be slipping on these. Here’s a quick hitlist of posts I’ve done on balance transfer arbitrage:

 Personal Finance 

Six 10-Minute Money Moves That Can Change Your Life

A lot of times we put something off because we think it will take a long time and be a lot of hassle and a lot of times those things happen to deal with money. Well, if you have ten minutes, you have enough time to do one of the things on this list that could change your life financially for the better (and ten minutes is a conservative estimate, you could finish most less). In less then 15 minutes, Jack Bauer can escape from the grasp of terrorists by biting into a man’s jugular, I’m just asking for ten and for you to check your credit report (#1) – sounds fair right?

  1. Request Your Credit Report – If Congress can spend countless hours (and millions of taxpayer dollars) in debate to pass a law that gives consumers free credit credit reports each year (one from each of the three credit bureaus), the least you could do is spend the fifteen minutes it takes to request and scan over your report. Get your free credit report from the only officially sanctioned website – You could find a mistake that could cost you thousands of dollars in added interest or higher fees down the road. The request itself takes no more than ten minutes so request and print now, review later.
  2. Open A Roth IRA – I wrote a post about opening up a Roth IRA that details every step and the financial impact of doing so. If you want this to truly be a 15 minute move, put the contribution into a Target Retirement/Lifecycle fund and let the brokerage worry about re-balancing it for you.
  3. Participate in your 401K – It wasn’t until recently that folks were automatically enrolled into their company’s 401K plan by default so if you aren’t yet participating, do so and make enough of a contribution to get the maximum employer match. All it takes is a call to your HR department to make it happen – you wouldn’t pass on a twenty dollar bill sitting on the sidewalk, don’t pass it now.
  4. Open a High Yield Savings Account – The typical savings account gives a piddly 1%, get five times that by opening a savings account at any number of FDIC insured online banks like ING Direct, Emigrant Direct, HSBC, Citi, the list goes on and on. As long as they’re FDIC insured (all those listed are), you don’t have to worry. Get the yield of a CD with the flexibility of a savings account.
  5. Split Your Paycheck – Out of sight, out of mind. Have 10% of your paycheck deposited into that high yield savings account and think of it as an “automatic” savings (in the sense that this is one of the ideas from the Automatic Millionaire – set it and forget it Ronco style) and you’ll never know the difference.
  6. Use 0% Balance Transfers – Use a 0% balance transfer (list of 0% bt cards) to pay off an existing credit card balance, it takes only a few minutes to apply for a card and a few minutes to do the transfer (I’ve found Citi has the easiest balance transfer process). The little brother to this tip is to just call up your credit card and asking them to lower your interest rate, saying that you could always just try a 0% balance transfer and leave them. Between 0% balance transfers and asking, Tricia from Blogging Away Debt went from $400/mo in interest to a mere $100 – that’s $300 that can go towards principal.

Don’t read anymore, go do!

 Devil's Advocate 

Say No To Credit Card 0% Balance Transfer Arbitrage

Devils Advocate Logo
This is a Devil's Advocate post.

I usually save Devil’s Advocate posts for more big time personal finance advice but with the recent spat of 0% balance arbitrage posts (of which I’ve wrote several), I felt that I should write a post arguing the potentials risks of 0% balance transfer arbitraging because you don’t see many of these out there. For those who aren’t familiar with the practice, basically you apply for a bunch of credit cards with 0% balance transfer offers, request a balance transfer check, and deposit it in a high yield savings account – pocketing the interest.

Here are some reasons why you shouldn’t do 0% balance transfers:

Universal Default = Death
Universal default is the keywords you should look for in your credit card agreement (don’t bother looking, I guarantee its in there) and what it means is that if you miss a payment, any payment on any account, you could see your 0% balance transfer offer interest rate spike up to rates as high as 30%. So if you miss a cell phone payment or a water bill payment or anything anywhere, you could see your 0% rate disappear.

Oh, and if your card does two cycle billing, you could get creamed the last two months as your 0% balance disappears but the “two cycle” math keeps it on the books. It’s a ridiculous thing but it does happen. No one has ever complained of this, I don’t have a card with two-cycle billing, so I’m not 100% sure this is true but it should be.

Your Credit Score Will Plummet
When you apply for credit cards, the bank will do a hard pull inquiry of your credit history to assess your credit worthiness. As you accumulate more and more of these inquiries, your credit score will fall lower and lower. As you request balance transfers from these new lines of credit, your credit utilization will increase tremendously and your credit score will fall lower and lower. Plus, when you pay off these debts, your credit score isn’t going to recover immediately – it takes a little while before you get back to normal. So, if you’re planning on any big purchases, this drop in your credit score will likely result in loans with a higher interest rate that will make your interest earnings look meaningless.

The Payoff Is Miniscule
Let’s say you get $10,000 in debt at 0%, you put it in a 5% high yield bank account, that means at the end of the year you’ll get about $500 for your trouble. Now, take out a fat chunk for taxes and you’re really talking about very very little (at 25%, you only keep $375, or $31.25 per month). Is that really worth all the trouble of setting up an automatic bill pay (or paying it manually) every month, double checking when the offer expires so you pay it off, and then sending a big payment?

Anyone else have any good reasons why you shouldn’t be doing 0% balance transfers just to make a few extra bucks?


Requested Another 0% Financing Balance Transfer

After taking out three 0% financing balance transfers last year and dealing with the hassles of them, I told myself that all the work wasn’t really worth it and that I wouldn’t apply for any more cards for the purposes of balance transfers. I am happy to report that I have not applied to any more credit cards and that this time the balance transfer offer sort of fell into my lap. I wrote on Monday about how you shouldn’t cancel your old credit cards because you never know when you’ll see something nice, like a balance transfer offer for no reason, and yesterday I initiated a new balance transfer off the Citi Platinum Select MasterCard.

The major downside to applying for a new card and requesting a balance transfer is that it will have a significant negative impact on your credit score. Since your credit utilization will increase and you’ll have yet another credit inquiry, it’s guaranteed your score will fall. This isn’t a concern if you aren’t planning on going after a mortgage or other large loan but I really didn’t want yet another item on my credit history so this particular scenario is perfect. I can get a balance transfer without another credit inquiry, so in essence it’s “free.”

Now, if you happen to find one of these free balance transfers, you should request a credit line increase before the transfer. On a typical arbitrage play, the card is brand new so the credit card company won’t increase your credit line limit but if it’s an “old” card, you won’t have this problem. Request the increase so you can put more onto the transfer! Sometimes you’ll get an automatic offer of an increase of a thousand dollars or so, just take that and make the transfer. Those offers usually require no credit inquiry and so they are perfect, if they don’t offer you that and instead require you to fill out a large form, just skip it. Since you’re taking advantage of the “free” nature of the offer, you don’t want a credit inquiry muddying it up.

Good luck!


Don’t Cancel Old 0% Balance Transfer Cards

If you’re a 0% balance transfer arbitrager, you probably have a couple credit cards siting in your desk drawer collecting dust because you weren’t sure whether you should cancel them after the balance transfer promotion period. Not canceling them certainly helps your credit score (lower credit utilization, longer credit history) but the downside of that was that you couldn’t reapply for those cards a few months later and take advantage of another balance transfer – or so I thought.

I was poking around the balance transfer offers of my Citi cards when I discovered that my Citi Platinum Select Mastercard. I had kept the card, using it only when shopping for groceries, and I’m glad that I did because this means I can get a free 0% balance transfer (i.e. no credit check). Does this mean that you should keep old cards around in the event they decide to offer you a fat balance transfer? My only expired balance transfer arbitrage play was on my Citi mtvU card which I’ve kept because it offers a nice 5% at restaurants and bookstores, but I’ve looked a couple times and haven’t seen any nice offers in there. Anyone else find a resurrected offer?


Pay Off Credit Cards with Home Equity?

Should you pay off your credit card debt with equity from your home? My simple answer is no but honestly it isn’t a simple matter at all.

Let’s take the case of Mr. Joe Smith who is carrying $15,000 in credit card debt, charging him 15% interest each year. Let’s assume that Joe Smith has learned the error of his ways, despite watching his home theater each night, and is now on the righteous path of financial prosperity and has stopped hemorrhaging money – now he wants to make right. Despite his credit card irresponsibility, Joe actually has quite a bit of equity stored up in his home and has considered taking out a line of credit to pay off the credit card debt. By lowering his rate from 15% to something as low as 6%, which is tax deductible, you’re talking about a savings of a good $1,500 a year. That’s serious money and that’s the main benefit of doing it.

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