Many smart folks save money by taking advantage of balance transfer credit card offers. With balance transfers, you are looking to transfer a high interest rate credit card balance to another credit card that offers a juicy low interest rate. In many cases, the annual percentage rate is 0% during a certain time frame. Before the promotional rate ends, you would pay off the balance transfer amount and save money on the interest that would have paid on the old high interest rate card.
Free Profits Using Credit Card Company Money
There are some very savvy credit card holders who have taken balance transfers to another level. They have figured out how to make a profit, using the credit card company’s money, every time they do a 0% or super low APR balance transfer. This practice, more commonly known as balance transfer arbitrage, when done right amounts to free money from something you would do in the first place – pay off your credit card bill.
How Balance Transfer Arbitrage Works
Instead of paying off the old high interest rate credit card balance right away, the savvy credit card holder is looking to have the credit card issuer cut them a check in the amount of the old credit card balance. If the issuer permits this, Mr. or Ms. Smart Card Holder deposits the check into a high yield savings account or a high yield money market account. The minimum credit card payments are made while the money is on deposit at the bank. Just before the teaser rate expires, the credit card balance is paid off with the funds on deposit in the high yield savings account. The profit is the spread between the interest earned on the balance transfer amount in the high yield savings and the payoff amount less the fees, if any, on the balance transfer.
What if you don’t have a balance on your credit card? If you have a car loan, student loan, personal loan or home equity line of credit, you may be able to transfer the balance to your new credit card. Even if you have no debt at all, you can still make money from this credit card tactic. Let’s say you were able to borrow $25,000 at 0% APR for a year and Citibank is paying you 5% interest for the year on that $25,000, that’s $1,250 for the year. Its not enough to make you rich, but its nothing to sneeze at either.
Learn The Game Before You Leap
Now before you start sifting through credit card solicitations in the junk mail or google “balance transfer offers”, you really need to understand the balance transfer arbitrage game. The first thing you need to understand is that balance transfer arbitrage is not for everyone. There are pitfalls to this credit card strategy and if you are not careful, it can backfire on you. If you have a negative credit history, if you are the type who “forgets” to pay their bills on time, if you lack the discipline to follow a plan, you should take a pass on this strategy. Also, this is definitely not for you if you regularly carry a balance on your credit cards.
The key to this balance transfer card strategy is understanding all of the terms & conditions of the offer. Only through a thorough analysis of the details can you discover whether there is a sufficient spread to make a profit. The APRs, the fees involved, the promotional rate period and most importantly, whether or not the credit card company will issue you a check that’s not characterized as a cash advance, can only be found in the fine print. Go ahead and start analyzing those credit card offers, there could be a golden opportunity to make some free money on your next balance transfer card.