Thursday, March 02, 2006

Cashing In With 0% Balance Transfers

I have been thinking of trying to make some extra money lately by using one of those credit cards that offers 0% balance transfers. Problem is, I am nervous about the consequences (lowering of my credit score) and I am not really sure exactly how it works. To try to help figure it all out, I read Jim's Making Money With 0% Balance Transfers over at Blueprint for Financial Prosperity and The Value of a Great Balance Transfer Deal over at PFBlog. I guess I can't say that it totally helped, because I am still confused.

Here is how I think that it works...someone correct me if I am wrong.
  1. I just got a credit card offer from Citi PremierPass American Express Card (wow...)
  2. I sign up for the offer (online, phone, mail it in???)
  3. They tell me my credit limit...this will be how much I can take out
  4. I ask them to send me a check for the amount of my credit limit (I thought that this was considered a cash advance, and you get charged for those, right?)
  5. I then take that money and deposit it in my ING, Vanguard, Emigrant, HSBC account
  6. Someone mentioned that I then need to pay back some portion of this monthly
  7. At the end, I then pay off the remaining balance
Sounds easy enough. What's the catch? Am I missing something about the whole process? What exactly do I ask for when I open the account? The most important question that I need answered...what exactly will this do to my credit score? I won't mind if it goes down a little, I just bought a new house, but I don't want to ruin my score. How badly will this effect it?

Any help would be much appreciated.


Blogger Stacy said...

I can't tell you the precise logistics, because I haven't done it. but I'd think hard about whether it's worth it to you. say you take out 20k, and put it in an account earning 4% interest. keep it there about a year, and you'll earn about $800 on it. BUT -- you have to keep up with the monthly minimum payments, just like any credit card. you have to keep an eye on the savings account. the minute the 0% APR wears off, you have to be ready to pull the money, pay off the card and close the savings account (unless you're going to keep playing the shell game). *and* you need to be sure you get an offer that not only has a 0% APR, but also has no balance-trasnfer fees. (most cards charge about 3% of the transferred balance, usually with a $75 cap.) you'll also be taking your credit score down, probably about 80 points (at a guess -- that seems about average). the two ways it negative affects you are by showing a new credit inquery (FICO doesn't like those) and by increasing your credit-utilization percentage, which sets off alarms if it gets above 30%. (so, if you take out 20k, you'd want your total credit line to be 60k to protect your score.)

you can do it and make money off it, but to me, the headaches have never seemed worth it.

3/02/2006 11:19 PM  
Anonymous Nathan Whitehead said...

In my blog I have a couple posts on this.

If you do this strategy, read all the fine print and make sure you're not missing something. Because you have to pay the minimum monthly balance, the effective interest you earn is something like 80% of the APY of your savings account. The other thing to watch out for is that you can't use the card for anything, because as soon as any other balance goes on it you can't pay off the new balance until your 0% balance is paid off.

I don't think it's worth it for most people, since it lowers your available credit. Having credit available to you is a financial asset. By using these strategies you get cash out of the asset but lose future potential credit. Don't underestimate how valuable credit can be. I would only suggest even THINKING about this if you already have at least $20,000 in savings and investments available for immediate withdrawal at any time.

3/02/2006 11:31 PM  
Anonymous Tim said...

Any drop in your credit score from getting a new card is temporary. A lot of people worry about this...but it's really not a big deal unless you carry a lot of debt on a credit card that charges interest based on a frequently updated credit score. Anyway, best of luck to ya with that. Be careful card companies are sneaky.

3/02/2006 11:51 PM  
Blogger Nick said...

As Tim mentions, the credit score drop for getting a new card is temporary, and you'll recover from it pretty quickly. What you won't recover from quickly is the drop due to your high card utilization. Since you'll only be paying back the minimum each month (I'm guessing 2%), you'll be at over 80% utilization on that card for the entire 0% APY period. If you're planning to play the 0% balance transfer game, just make sure you don't actually need credit for the entire time you're playing (plus a few months to be safe).

As Stacy mentions, if you have more cards, that will help offset this. Or you can just go for broke, get a BUNCH of 0% balance transfers on several cards at the same time, and watch your credit score plummet to about 9 for a year or so!

3/03/2006 9:16 AM  
Anonymous Debt Hater said...

I've read about this too. I'm in too much cc debt to try it, but it still doesn't sound like it's worth it. Even if you put $10G in a high interest account at 4.25%, in a year you wouldn't accumlate the full $425 because you'd have to make minimum payments the whole time -- essentially just giving the money back little by little, decreasing the amount you have to draw interest from. It doesn't seem worth the hit on your credit score.

3/03/2006 6:54 PM  
Blogger RS said...

See why this is so many opinions on both sides of the fence here. Sounds like it is not as easy as I thought it would be, I will have to consider this a little longer.

3/04/2006 12:26 AM  
Anonymous CreditOwner said...

Basically you are right, but you have to watch out your credit score (as u know it influences many sides of ur life, as auto and home insurance and even your work status) and watch the card limit!!!

8/10/2007 6:29 AM  
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