Wednesday, August 09, 2006

Credit Cards: Using the 0% Balance Transfer Offers To Get Free Money

If you are very conscientious, very good with paying bills on time, and a responsible credit card user, then this is something to consider if you have the time, patience, and due diligence to pay on time and keep track of dates and money. The general idea: open a new credit card with 1 of those mail-in offers (or online) (of course, making sure the terms of conditions are favorable with 0% interest for 1 year, no balance transfer fees for the term of the new offer, and then do the balance transfer, transfer the balance to another credit card; then, get the money in a check from the other credit card, and put the money into your checking account, and transfer it to a high-yielding savings account or 3-,6-,9-month CD to earn the current interest rates (of ~5%+). Pay the minimum payments due each month, and maybe a few extra dollars to show willingness to payback credit debt (which may favor credit reports.) Do not use the credit card for anything else! During the last month of your 0% interest offer, move money out of savings into checking, and pay off the full balance due by the due date (or else you will be charged the current interest rate for your card, which may vary from 10-18%, not including any default rates for late payment or other.)

A good blogger on personal finance at mymoneyblog described this process in great detail with very nice examples. He does say you have to be very careful with what the offer reads; because some cards, even during promotional period may charge a balance transfer fee.

Interestingly, this is not new. Almost 10 years ago, my sister did the same thing. However, during that time, balance transfers and some convenient checks actually had grace periods similar to purchases and had no transaction fees. Only cash advances had transaction fees (which were 2% then) and no grace period. She told me that she used one of those checks and simply wrote it to herself. There were no fees or finance charges on it for several months. She invested in the stock market and money market mutual funds with the money, while maintaining the minimum payments due each month. Of course, those days there were no online, high-yielding saving accounts.... not even NetBank (which started around 1997-8). She did quite well, probably earned more than interest rates of that time.... but she stopped doing it once the terms of her credit cards changed to make balance transfers and convenience checks have no grace period, and started charging transaction fees for using balance transfers (at 2%, upto $25-50 during that time.) Unfortunately, most credit card companies charge 3% for balance transfers, with a maximum between $60-75 (MBNA cards do not state any maximums for balance transfer fees. That's scary!) Almost everything has no grace periods, with the exception of purchases, which generally now only has 20 day grace. It used to be like 28 days. Cash advances are now 3% with $10min, no max, and no grace periods.

So, if you want to learn about the details and fine prints on how to take advantage of getting some free money from zero percent balance transfer offers from your credit cards, then go over to mymoneyblog. Note of caution: I think it only works if you are responsible and good with credit cards and payments. Have a great day!

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