March 13, 2007
0% Balance Transfers Are Dangerous
I’ve read a lot of bloggers views on why 0% offers are such an attractive deal. Some make a pretty good argument on how to make “decent” money by following a pretty easy plan to receive interest on the borrowed money. This seems attractive at first, but the negatives really do outweigh the positives.
Here’s a quick list of the positive reasons.
Extra money- You will receive an extra $10 to $40 per month after all is said and done.
Making money off someone else’s money -Leverage is usually always good.
No money down option -You don’t have to put up any financial backing/money or collateral/tangible asset to earn interest.
Here are the negatives I can think of on the top of my head.
Huge financial responsibility -Can you discipline yourself to stay on top of the minimum payments and not rack up any other kind of debt? This is very hard to do for 99% of the American population. Just because it’s free money doesn’t mean you don’t have to make large monthly payments to amortize the debt.
Having the extra cash flow - Can you make the large monthly payments on top of your regular bills? This can pose a big problem for most people. Your minimum payment can reach up to $300 bucks a month! Here’s a simple solution for this problem. Just payback the loan with the money you borrowed, but you will be cutting into your gain (which that would totally suck).
Is it really worth it? - What happens if you couldn’t afford one of the monthly payments because your car broke down and you need the extra money to pay for the repair costs? What if you become incapacitated or lose your job? Your interest jacks up and you no longer qualify for the 0% offer. Your minimum payment could easily triple in one month and for the life of the card. These issues can easily spring up on the drop of a dime.
If you really want an extra $400 dollars per year, consider investing a little more and spending a little less. Learn the rules about retirement accounts to save money on taxes. You can certainly be $400 dollars richer by cutting out random purchases for six months. Shop online for things you buy at a store and learn how to bargain on pricing! The gain is not substantial enough for me to throw on a couple hundred pounds of stress on my back. If you really want to be cheap, learn how to conserve on things you’ve never even thought of.
0% CC arbitrage is not for me because I’m a bit sloppy with bills. Just this past month, I missed the due date, paid 1 day late and didn’t notice until the next statement. That would have been quite the calamity if I had a ton of credit out.
On the otherhand, you say $10 to $40 a month afterall is said and done. That’s a bit on the low side IMO. I’m have 70K in available credit in my current 3 cards. 4.5% after fees would be over $3150/yr ($262/mo). If I applied for 10 more cards, I could easily get 200K available credit or more. $9000/yr ($750/mo) is quite a lot of money to be making without much work (other than constant worrying and keeping track of the CC payments of course). For those who can sleep well at night, it’s a pretty easy way to make money.
Yeah, but you’re forgetting about the minimum payments for 200k. It would be pretty damn high. It would be an extremely bold move if someone were to take out 200k and just invest it in a 5% return. Very bold!
Pay the minimums from the credit balance you took out. It all adds up to the same at the end.
Yeah, but that cuts into the profits. I know that would be a last resort, but I would consider just finding different ways to make money. If this is a main source of income, people need to re-evaluate their day job.
I’ve seen many of these touted as well. You have to be extremely disciplined to pull it off (besides being very careful with the fine print).
Great post.
Entered website incorrectly.
Also want to add that many of the advocates for the App-O-Rama scheme don’t give the full calculation of exactly how much someone can make in doing this balance transfer game. Many FatWallet Finance member skip that detail. A post can be found in Fatwallet titled App-O-Rama: Is there such a thing as a free lunch? The poster included a calculator that does the profit fair well at:
http://www.moneyeconomics.com/articleInterestArbitrageCalculator.php