How To Make Money From Balance Transfer Credit Cards
Published 5/1/08 (Modified 3/8/11)
As regular readers of my personal finance blog may know, I'm an avid credit card user and like to discuss the strategies and tips I use to maximize the credit card rewards I earn. While it's certainly not everyone's cup of tea, adopting a responsible multi-credit card carrying approach has allowed me earn quite a bit of cash back income and frequent flyer airline miles from everything I purchase. Other than purchase rewards, credit cards also offer cardholders another very valuable and functional perk - the ability to make balance transfers and take advantage of balance transfer arbitrage. A key deference to the versatility and value of credit cards is the option to use special 0% balance transfer cards to perform a wide array of financial actions that benefit the cardholder. Such actions include the ability to help pay down debt by shifting high interest credit card loans onto 0% balance transfer offers to weather difficult cash-strapped financial times. Even for those blessed with an otherwise debt free lifestyle, balance transfer cards allow the clever arbitrage profit-seeking card holder to make money by taking advantage of special promotional rates.
Balance Transfers Allow You To Take Advantage Of Interest Free Loans For Debt Reduction and Credit Card Arbitrage Purposes
Balance transfer credit cards are key tools in my money management arsenal. Of course, the benefits are clearly tempered by the inevitable hazards. It's the classic opportunity that necessitates the walking of a fine line to chase higher risk rewards. To successfully navigate and perform a balance transfer without a hitch requires a scrutinizing eye for fine print detail, adherence to deadlines, willingness to make timely minimum payments, and the ability to follow directions carefully. Once you increase your financial knowledge and understand how the balance transfer process works, you won't find this credit card perk so daunting or prohibitive.
The versatility of 0% balance transfer credit cards stem from the promotional teaser rates that many of them offer to new card holders. Most standard credit cards charge an interest penalty that compounds and add to the cumulative amount owed when you don't pay off your balance in full every month. However, most major credit card issuers are willing to waive that initial interest fee for up to a year or more just to entice your patronage and earn some new business. Because credit card companies are perpetually locked in fierce competition between each other for new card accounts, they are willing to offer tremendous promotions and introductory teaser rates to attract the attention of consumers like you and I. The credit card racket (I mean business) is worth a significant amount of money to the credit card companies and they are willing to dangle giant tasty carrots in front of consumers, even if it means providing 0% APR offers for balance transfers lasting up to a year or more. As part of their never ending marketing efforts, credit card companies frequently mail promotional offers out to select consumers with good credit scores. However, as an Internet-oriented person who likes to comparison shop online, I prefer to select and choose the most appropriate 0% balance transfer card for myself.
What Is A Credit Card Balance Transfer, and How Do People Pay Down Debt And Make Money From Balance Transfer Arbitrage?
A balance transfer is the process of shifting credit card debt from one credit card to a newer one offering better terms and interest rates. Balance transfer credit cards contain several conditions and terms that all cardholders most pay attention to when evaluating offers - the promotional or introductory teaser interest rate, the duration of the promotional period, and the balance transfer transaction fee.
The introductory Annual Percentage Rate (APR) is the interest rate offered and the primary attraction of these balance transfer cards. These 0% grace periods give consumers access to reliable and interest free loans for a certain duration, allowing themselves or their business the time to reduce their debt or earn a profit. Different credit cards offer different types of promotional interest rates for different purposes. Some credit cards offer introductory 0% APR periods for all purchases in lieu of balance transfers, while other cards stick to just offering zero balance transfers. Individual terms do vary depending on the specific card issuer. Some balance transfer cards require all transferred balances to be made at the time of the initial card application. Others provide a window of up to 3 months, allowing all new balance transfers made during that time range to qualify for the 0% teaser rate.
As for balance transfer fees and duration, there is always a trade off between these two. Balance transfer credit cards with balance transfer fees usually offer longer promotional durations, while cards that waive the fee usually have shorter durations. The balance transfer fee is the onetime initial transaction fee (usually 3%, occasionally capped) that is levied by some credit card issuers as a percentage of the credit card balance being transferred. Not all credit card issuers impose this fee and some waive it for promotional reasons. Most balance transfer offers that do not charge the one time balance transfer fee usually have shorter promotional durations of 6-12 months. Offers that do charge a fee usually last longer - up to 12 months or more. However, oftentimes while balance transfer fees tend to be around 3%, many have maximum caps of around $75. Because there is a maximum fee limit, if you're looking to transfer a large balance ($5,000-$10,000 for example), the one time fee shouldn't be too significant of a deterrent in light of the huge amount of money you'll save by not having to pay interest on your credit card balances.
In general, the primary incentive and objective for most balance transfer credit card seekers is to find a balance transfer offer with the lowest interest rate (preferably zero percent), with the longest duration (6 months or more), with the lowest balance transfer fee possible (preferably none). However, if you are looking for a long term balance transfer, paying a one time capped 3% fee as a trade off may be worth getting the longer duration.
What You Should Look For In a Balance Transfer Card Will Vary Depending On What You Are Looking To Do:
- Pay Off Short Term Credit Card Debt - For those who are financially cash strapped or in need of a quick short term loan to pay down their credit card bills, no balance transfer fee credit cards for 6 months or more work the best. The 0% APR interest gives you a window of time to avoid paying any interest while you gather your finances to pay down your debt. No fee balance transfers will usually indicate that the fee is waived in the promotional written material, or in the tiny terms and conditions it'll state something like "There is a balance transfer fee of 3% with a $5 minimum" but "There is no fee with the 0.00% APR balance transfer offer described above." You can think of no fee balance transfers as a short term safety net for times when you really need them. I've personally used these offers before during times when I had short term cash shortages but faced emergency expenses such as expensive car repairs or tax bills. Of course, my intention was always to pay off the credit card debt in a few months.
- Pay Down Long Term Credit Card Debt - For those with a lot of credit card debt or are struggling with monthly credit card payments, they should seek out extended 0% balance transfer offers that provide a longer grace period. Credit cards that offer 0% APR for 12 months or more are the most ideal for those looking to avoid paying interest while they slowly pay down debt. Most of the 12 month balance transfer cards do impose a standard 3% fee, but some offers cap it at somewhere between $75 and $100. If you are looking to transfer a high credit card balance or need extra time to pay off your debt, the one time upfront fee is probably worth the cost of securing a long term deal. Now if you really have a lot of credit card debt in excess of $10,000, you may want to apply for multiple balance transfer offers or you may even need to seriously consider a balance transfer for life card. Lifetime balance transfer credit cards rarely provide a 0% interest rate, but they do allow you to lock in a low fixed interest rate for the life of the balance. While you'll still have to pay a little bit of interest, the advantage is that there is no year end deadline that you have to pay everything off, as the fixed rate stays in place until the balance is paid off.
- Make Money From Credit Card Arbitrage - Those looking to make money from balance transfer arbitrage should seek out 0% balance transfer credit cards that waive all balance transfer fees as well. The key to making money from what some people commonly refer to as the App-O-Rama is to limit your transaction charges as much as you can to maximize the free loan money you can take advantage of. The concept of arbitrage is to take advantage of inefficient price differentials in two or more markets and to profit from this imbalance. As long as you can obtain free balance transfer money from introductory credit card offers, you can take advantage of this free loan money by investing the balance in high yield online bank accounts and earn arbitrage profit. Of course, naturally you'll want as long of a duration as possible, but keep mind that many 0% balance transfer no fee cards are limited to only 6 month periods - 12 months cards are getting harder to find these days.
Here Is How You Perform A Balance Transfer and Successfully Profit From Credit Card Arbitrage (10 Step Guide):
Before you even think about applying for a 0% credit card offer or starting a balance transfer, you must read and be aware of common balance transfer mistakes and pitfalls. You must understand that balance transfers do not last forever and that they operate within specific time frames. After introductory teaser rate periods expire, balance transfer cards usually automatically reset to much higher interest rate levels. Also keep in mind that there are important differences between cash advances and balance transfers. You want to seek out the balance transfers, not the cash advances that are oftentimes not covered under these introductory offers. Here is what you'll need to do to make a balance transfer:
1) Educate Yourself About Balance Transfers and Credit Cards - Before you transfer a balance, you need to know how the process works by understanding the terminology, the timetables, the promotion deadlines, as well as the risks and benefits. Be aware of all these things as you start the process.
2) Know Your Credit Score - Request your official free credit report and your free FICO credit score to evaluate your credit worthiness in the eyes of credit card companies. Balance transfer credit cards usually require above average credit scores so you must check to see whether you qualify for such offers to begin with. Obviously if your credit score is terrible, your chances of qualifying for one are probably slim.
3) Decide How Much Balance Transfer You'll Need - Evaluate the amount of outstanding high interest credit card debt you have (if any) that you may want to transfer over to a balance transfer card offering 0% APR or a low fixed interest rate. Decide on the amount of 0% credit limit that you will need to handle your transferred balance. You should be aware that you have little control over how much credit card limit your new balance transfer card will offer you. If you have a stellar credit score and clean history of timely card payments, you are likely to get a much higher limit in the range of $5,000-10,000 when you open a new credit card account (business credit cards offer even higher limits). If your credit score is only average, you may only get a credit card limit of $5,000. This may determine whether you will need to apply for multiple offers or not.
Now if you have no actual high interest card balance to transfer but instead are looking to make money from balance transfers, you'll need to decide how much interest free loans you would like to take on. Obviously the higher total 0% APR credit limit you have, the more zero percent balance transfer money you can withdraw and invest in a high yield savings account to earn credit card arbitrage profit.
4) Scout, Examine, and Evaluate All Potential Balance Transfer Credit Card Offers - Currently, there are three major types of 0% balance transfer credit cards. There is the long term low interest lifetime balance transfer card which is suited best for those looking to carry an unpaid balance for a year or more. There is the 0% balance transfer card that has an upfront balance transfer fee that charges a percentage of your total transferred balance amount as a processing fee (usually 3%). And finally, there is the 0% balance transfer no fee offer.
As discussed above, you should choose your type of balance transfer offer based on what you intend to accomplish. No fee balance transfer cards are the best because they charge no upfront fees and still enjoy the 0% APR rate for the duration of the promotional period. Unfortunately, their promotional and introductory periods are usually shorter than cards that impose a one time balance transfer charge. 0% cards with balance transfer fees usually have promo periods of 12 months or more. No balance transfer fee cards typically only last for 6 months. There are some 12 month no balance transfer fee offers, but they are rare.
5) Apply For the Balance Transfer Card Of Your Choice - After you've decided on which category of balance transfers best fits your financial purpose and situation, you should apply from a list of balance transfer offers. While those with low levels of credit card debt may choose to apply for only one card, some people opt or require multiple balance transfer cards to handle the size of their balances. If that is the case, you should decide whether you will be better suited applying for more than one card. When you are asked on the online card application how much you wish to transfer, you should always ask for as much as possible, up to the amount needed to suit your purpose. Since you can't predict what your new credit card limit will actually be, it's best to request as high (double or triple) of a balance transfer as possible. It's better to be denied for a high balance transfer than to request too little.
You should be aware that every credit card application you make is considered a hard credit check that makes a temporary, but negative hit on your credit score due to the fact you are seeking credit. While credit scores almost always recover once all balances are later paid off, you can minimize the hit by keeping multiple credit card openings to within a short period of time. Rapid credit checks in succession are oftentimes treated as a single inquiry in the eyes of credit reporting companies. Keep in mind that certain card issuers such as Citibank limit the total number of credit cards you are permitted to own under their brand. Thus, if you already own multiple Citi Cards for example, Citibank may ask you to reduce the credit limits of your other cards and shift the excised credit limit to your new balance transfer card.
6) Transfer The Balance From Your Old Card To Your New 0% Promotional Rate Card (Requires Multiple Cards) - This is generally regarded as the indirect method of balance transfer as it actually requires you to have another credit card other than the one you are applying for. It's the recommended method for those with credit card debt that needs to be shifted to the new card, and for those looking to pay down credit card debt. When your credit card application prompts you to do so, you must provide the account number information of your old credit card that you want to transfer from and the amount you want to transfer. The process may take a few days or a few weeks but the new 0% credit card you are applying for effectively sends the requested amount as an automatic payment applied to your old credit card balance. By doing so, the old debt will now appear as a liability balance on the new card, albeit enjoying the new introductory 0% teaser rate. Meanwhile on the old card, the balance will presumably have been paid off, so the balance should now be zero.
For those looking to make money from balance transfer arbitrage, the money transfer procedure will still require an old or secondary credit card for the indirect balance transfer process to work. Upon request pursuant to your instructions at the time of application or later on, your 0% card will send payment to the old card for the amount you request. If the old credit card already contains a zero balance, what will result is a negative credit balance on your old card as a result of the payment. This negative credit balance on the old card is essentially now an overpayment that you can withdraw and do as you wish, and the balance is now owed on the new 0% credit card you opened. For most credit card issuers like Citibank, Chase, Discover Card, and American Express, you can simply either request an online credit refund online via ACH transfer, or if the online refund option is not offered, you can simply request a credit refund check for the amount of overpayment. Citibank offers the most convenient credit balance refund since everything can be easily done via your online account.
Depending on the individual card offers, you may be required to make the balance transfer at the time you apply for the credit card to qualify the balance for the special promotional 0% rate. Other offers permit you to make as many qualifying balance transfers as you wish within a few months of opening the card. Make sure you follow the specific terms carefully.
7) If The Option Is Available, You May Request A Balance Transfer Check Instead (Multiple Cards Not Needed) - If your purpose of applying for 0% balance transfer credit cards is to make money from interest free credit card loans, you likely have no other actual credit card debt to transfer to this new 0% rate card. Some credit card issuers may allow you to conveniently request and issue yourself a balance transfer check for the full amount that you wish to transfer. Some card issuers will send a paper check to you while others will offer you the option to deposit the balance transfer amount into a bank account via the routing and account number provided. Whether via paper check or online payment, if the option to receive the balance transfer payment without needing a secondary credit card is offered, you should take this direct method - it's a lot more convenient and hassle free. By depositing the requested balance transfer check into your bank account or sending the check over to another credit card issuer as payment, the check amount effectively transfers money to the target account, thereby resulting in an owed balance on the new 0% balance transfer card.
If your goal and purpose is to make interest free money from 0% credit cards, you should quickly deposit the amounts into your choice of high interest savings accounts. Whatever you do, do not even think of putting the money into the stock market. I know it is tempting to have all the interest free money, but the stock market is too unpredictable and risky for credit card arbitrage purposes. Be smart and stick with high yield bank accounts - don't gamble your financial life away.
8) Remember To Pay Your Balance Transfer Credit Card's Monthly Minimum Balance On Time - To avoid violating balance transfer rules, you'll need to at the very least remember to make your monthly minimum payments. What I personally do is set up automatic monthly electronic payments through my bank checking account and set up online payment alerts. The process usually takes a month to set up but once it is put in place, there is less of a worry that you'll forget to make your monthly minimum payments. Of course, you'll need to make sure you always have sufficient money in your bank account if you intend to install automatic debit payments. Making your monthly payments is incredibly important because a single violation of your credit card terms will cause a terrible balance transfer disaster, triggering your 0% promotional period to be canceled and reset to the standard high credit card rates. Be smart and diligent when it comes to this. Following balance transfer rules is serious business.
Some people recommend making regular payments in excess of the minimum requirement towards the credit card balance throughout the year rather than waiting until the very end to make a huge payment. Obviously this makes a lot of sense (and cents) and is the correct course of action for those who sought the 0% offer to help them ease the interest rate pain of paying down credit card debt. But for those looking to make money from balance transfers this sort of defeats the whole purpose of balance transfer arbitrage. To make money from balance transfers, you want to leave as much 0% loan money in your interest generating bank account for as long as possible. Thus, unless your balance transfer purpose was to pay down debt and not to make money from credit card arbitrage, other than pulling money out to pay off your monthly minimum payments as needed, you probably should wait until a few weeks before the end of the 0% balance transfer promotional period before paying everything back in one large chunk.
9) Pay Off The Balance Transfer In Full Before It Expires - The moment you put the 0% balance transfer period into effect, you must find out the exact calendar date that the promotional period expires. This is terribly important - find out the exact expiration date and verify to make sure. Record this date on your calendar or set online reminders to alert you when the 0% period is up. Personally I use my Yahoo email calendar alert function to send me email reminders a month and a week before important dates.
While fixed interest rate balance transfers have no time limit, I want to reiterate that 0% balance transfers on the other hand do not last forever. At the 6 month or 1 year mark when the promotional period expires, your 0% credit card rate will suddenly reset to the standard high interest levels (APR as high as 15-20%). If you have any unpaid balance at that point, the entire balance transfer will become due with devastating interest rates imposed. Your imperative goal should be to pay back the entire amount in full before expiration. If you borrowed a lot of interest free credit money, you will have to pay back quite a hefty sum, so keep this in mind. If your goal was to make money from balance transfers, I presume you have wisely invested the money into high yield bank accounts, earning free interest money. At the end of the balance transfer period you should withdrawal the entire remaining amount from your savings account or money market fund and pay off the entire credit card balance.
10) What To Do With Credit Cards That Have Exhausted Their 0% Introductory Periods - After you pay off your credit card balance, your credit score will recover. As for the credit card that's exhausted its promotional period, there is no sense in cancelling it really. Because total credit limit available is a positive component of calculating FICO credit scores, canceling the card will only reduce your overall credit limit available, thereby hurting your score further. I recommend not cancelling any cards. If the card offers credit card rewards for purchases, you may consider adding it to your wallet of reward credit cards to use on a regular basis. Of course, if you have no intention of using it ever, you may simply want to put it away in a safe place.