Credit Card companies offer Balance Transfers because they want to make money. It’s that simple. They don’t expect you to take their money and stick it in a bank. There are two main ways they can make money on this program.
The first is if you actually transfer the balance from another credit card. They give you 6 or 12 months at no interest with expectation that you will not pay it all off in that time. Once the program expires, your interest rate spikes.
The second way is if you make a mistake and charge something to the credit card you are carrying the 0% offer on. Or if you miss a payment and they spike your interest.
When you follow the arbitrage program, you are costing them money. There’s nothing wrong, immoral, or illegal about it. They are taking a gamble. If they win, you pay lots of interest. If you win, you use their money for free for a period of time, earn lots of interest and then pay it all back.
So you are both gambling. To win, you need to avoid some common pitfalls.
- New Purchases
Usually, the 0% offer does not apply to purchases. You should only do the arbitrage program with a credit card you already have a $0 balance on.
When you make a credit card payment, the company will (usually) apply the payment to balances with a lower interest rate first.
For example, Joe has a $30,000 credit limit on his visa. He spends $2,000 on clothes for whatever reason. The credit card has a 12% interest rate. Every payment he makes on that card means he will pay less interest the following month, because the balance is declining.
If Joe now gets a 0% balance transfer offer, he might take $27,500 on it. That leaves him with two balances on the card – one for $2,000 at the purchase rate, and another for $27,500 at the balance transfer rate.
Unlike in the first scenario, Joe will pay more interest each month because all payments he makes will go to the $27,500 balance, and none to the $2,000 balance. Additionally, since the purchase balance is not going down, but is instead accruing interest, that balance may actually go up.
If you think you might need the card for purchases, the arbitrage program may not be for you.
- Universal Default
Some credit card companies include this clause in their agreement with you; others don’t. It means if you make a late payment to any creditor, your 0% BT can go away and they’ll raise your interest to (in some cases) more than 30%.
If there’s a chance you will be subjected to the Universal Default, the arbitrage program may not be for you.
- Credit Score
Taking out a large Balance Transfer will lower your credit score. Exactly how much it will affect your FICO score is anybody’s guess. But your credit score affects mortgage rates, car loans, employment opportunities, and insurance rates.
If you anticipate the sort of major life change that requires the highest FICO possible, the arbitrage program may not be for you.
The arbitrage program doesn’t require constant attention, but you do need to closely track your bills and credit card statements. You also need to monitor your checking and savings accounts to make sure all monthly transfers are happening correctly and on time.
If you don’t balance your checkbook, or keep close watch on your statements and other paperwork, the arbitrage program may not be for you.
- Bill Paying
I mentioned it before, but having the discipline to pay the minimum on the monthly 0% BT bill on time is critical. It’s also important to pay all your other bills on time during the program to make sure the Universal Default doesn’t kick in.
If you aren’t absolutely sure you can meet all your monthly obligations, the arbitrage program may not be for you.
- Chunk of Cash
While you are doing this program you may have a $40,000 balance in a savings account from your 0% Balance Transfer. The whole point of the program is the give that money back after 6 – 12 months. It has to be there.
If you (and others with account access) do not have the discipline to leave the cash there, the arbitrage program may not be for you.
- Random Errors
Things happen. Credit card numbers get compromised. Billing errors pop up occasionally. Unexpected issues can derail the plan.
If you are not comfortable handling these issues, the arbitrage program may not be for you.
For those that are aware of the risks, and comfortable managing them, the arbitrage program can be a great gamble. But beware of the pitfalls and details. And you just may beat the house.