In my last post about balance transfer arbitrage, I pointed out that banks and credit card companies are once again offering 0% introductory rates on transferred balances. Several years ago, it was common to find balance transfer offers where there was no balance transfer fee, no interest, and the user was not charged an annual credit card fee. In recent years, with the tightening of loans during the economic recession came an increase in balance transfer fees to anywhere from 3% to 5%. However, the current crop of offers has started to move back towards 0% balance transfer offerings. How can you take advantage of them? Here are four unique strategies to benefit from these offers:
1. Pay Down High Interest Rate Credit Card Balances
The most basic and practical use of 0% APR balance transfer offers is to pay down high interest credit card balances more quickly. If you have run up a large credit card balance that is carrying an interest rate of 8%, 14%, 17% or even higher, transferring that balance to a new card with a 0% rate can really help you to get a head start on paying down that debt. The danger comes when folks continue to use credit cards after transferring the balance instead of cutting it up or freezing it until all of the debt is gone.
2. Pay Down Other Loans
I know people who have used 0% APR balance transfer offers in order to get ahead on larger loans like college student loans, home equity lines of credit, and even car loans. This use of the balance transfer can be a little tricky because the loan must be paid off or transferred to another 0% offer when the introductory period ends, otherwise you might be facing an extremely high APR at the end of the introductory period. For instance, if you owe $10,000 at 9% on your family car, you might be able to transfer that balance to a new credit card and reduce your interest rate to 0% for twelve or even eighteen months. By doing this, your payments will go 100% towards the principle for the length of the introductory period and you can make huge progress on paying down your balance. However, when the introductory period is over, your rate could jump up to a level much greater than 9% – unless you transfer it again or pay off the balance in time.
The best time to use a 0% balance transfer for this purpose is when you are close to paying off a particular debt – if you know that you can completely erase the balance during the introductory period.
3. Make Money Through Balance Transfer Arbitrage
Credit card arbitrage happens when a person accesses a large amount of cash through a 0% APR balance transfer, deposits that money in an interest-bearing account, repays the balance before the introductory period is over, and then pockets the profit. Because of higher balance transfer fees and extremely low savings account interest rates in the past couple of years, balance transfer arbitrage became unviable. The savings account interest rate needs to higher than the credit card balance interest rate in order to profit. When balance transfer rates are high, the only way you can take advantage is through riskier means like investing the money in the stock market, gambling, or using a peer to peer lending site.
4. Use As An Emergency Fund
There are many people who have been unable to save up an emergency fund. One interesting solution is to keep a little 0% balance transfer money in the bank to avoid borrowing more money when your transmission falls out or your child visits the hospital. In other words, if you have no emergency fund and your cash-on-hand is low, a rolling 0% balance transfer can be a low-cost way to handle a financial emergency – if you are disciplined. Do not spend the money unless it is truly an emergency, and make sure you pay off the amount or roll it over before the introductory period expires. This is money for an emergency, not for a vacation to Disney World!
For the next article in this series, I will give tips and techniques on how to access a 0% balance transfer line of credit and turn it into cash.
What are your thoughts on 0% APR balance transfer offers? Have you ever taken advantage of one?