The 0% Credit Card Balance Transfer Game

The competition amongst credit card issuers is cut throat. So much so that many issuers are offering 0% balance transfer offers to new and existing customers in an effort to increase their outstanding balances on the books. A few brave souls have seen this as an opportunity to earn a little interest using "free" money. However, this is a risky technique that could wind up costing hundreds of dollars in fees.

The 0% APR Balance Transfer Game
Here's how the game works. People sign up for an account to receive the 0 APR balance transfer promotional offer. The bank approves their credit card application and assigns them a credit line. The new customer takes the balance transfer checks enclosed and deposits it in their local bank for the amount of their available credit (subtracting any up-front fees on the processing of the check). The proceeds from that transaction are then moved to an interest-bearing account - usually an online savings account with an above-average interest rate such as HSBC or ING Direct. Minimum payments are made to keep the credit card account in good standing. At the end of the balance transfer term, typically 6 months to a year) the balance is removed from savings and the credit card balance is paid off. The remaining amount represents interest earned over this period of time.

Credit Card Issuers Smarter Than We Think
Credit card issuers are much smarter than most people realize. You may wonder how banks make money lending at 0% interest rate. Card issuers know the average person will miss a payment by a few days, or creep ever-so-slightly over their credit limit, and when this happens that 0% interest rate can jump to as high as 22% for the amount transferred. You will not receive any advanced warning because most credit card agreements allow for this punitive rate to kick in immediately if any of the terms are violated. As a matter of fact most people don't realize their terms have changed until they get a bill with $100 in interest charges that weren't there the month before.

Is It Worth the Trouble?
As you can imagine, people go to great lengths to track their transfers to be sure not to exceed the term of the promotional offer, or miss a payment. Elaborate spreadsheets and calendar tools are developed specifically for this purpose. You have to wonder if all this trouble is really worth it. The average online savings account is now offering rates at around 5%. A $10,000 investment will earn $500 annually at this rate. To maximize their returns some have several of these promotional rates running at once. Again, the problem is that the more money you have exposed under this plan the higher your risk. If you are only earning $500 per year, or roughly $41 a month, on this plan one slip could cause you to lose several months worth of interest after receiving the punitive rate to just one of your balances. A safer way to invest would be to simply spend less than you earn, and direct those savings to these online savings vehicles. When you have saved $10,000 you will still earn $500 annually, but this time you are doing it without the added risk.