Back in the heyday of easy credit, some savvy consumers found a way to make money on credit cards—instead of the other way around. They played a nice little game of musical chairs: Take out a new credit card with a 0% APR balance transfer offer, invest the money in a high-interest savings account at a 3-5% return. Then, when the 0% APR expires, transfer the balance to a new credit card with a 0% APR and keep the money earning a nice return in the savings account. Rinse and repeat.
This little game of credit card arbitrage had many followers; whole website communities sprang up with tips for finding the best credit card deals, pitfalls to watch for, guidelines on how to minimize hits to one’s credit rating when applying for new credit cards, and so on. Some people made a nice little side income by putting in a couple of hours a month playing this game. Serious players accumulated upwards of $200,000 or more in credit card debt in order to invest it in a money market account.
In the current credit environment, playing musical chairs with credit card balance transfers, however, is no longer such a great idea. People who try to game the system may find that the days of great balance transfer deals are over and the terms of credit card transfers are too onerous to provide any advantage.
Even card holders who simply want a balance transfer to shift their credit card debt to cards with a lower interest rate or 0% APR offer may find that playing the balance transfer game has become a dangerous proposition.
Here are some of the changing rules of balance transfers and what to watch out for:
1. Changing terms. Great 0% APR offers used to be like low-hanging fruit—there for the picking, if you had even a half-way decent credit rating. Not so anymore. Credit card companies still try to attract new customers with alluring 0% balance transfer offers. But the fine print tells a different tale. The 0% APR offers are generally much shorter, from three to six months. And, while offers without a balance transfer fee used to be the rule, balance transfer fees can now run as high as a 5% uncapped fee. A three-month 0% APR offer with a “low” 3% balance transfer fee loses its charm when the default APR, sometimes as high as 29.99%, kicks in during the fourth month.
2. Offers are harder to come by. There are fewer good 0% APR offers and it’s harder to get approved; the best offers are reserved for people with a stellar credit score of 750 or higher. If you need to transfer a balance because you have high credit card debt, chances are you won’t qualify for the few good balance transfer deals that remain.
3. Credit companies are more trigger happy. A 0% APR offer may not mean 0% anymore. Miss one payment by even a day and suddenly you might see that 0% interest rate jump to a default rate of 29.99% or higher. At the same time, your minimum payment will double. If you’re already in a precarious financial situation, this alone could be enough to tip the apple cart.
4. Your credit score is likely to take a hit. Each time you apply for a credit card your credit score takes a hit. Just as bad, keeping a high balance on your credit cards can hurt your score further. If your credit score drops, it could affect the terms on your existing credit cards, causing card issuers to slash credit limits and/or raise interest rates.
In short, balance transfer offers can still be a great deal, but in today’s economic environment they should be approached with caution. Don’t play the credit card transfer game unless you have the money to pay off the balance at a moment’s notice. Otherwise, you could find yourself stuck with some very onerous terms because you are unable to transfer the balance to another card.
If you’re finding that you have to rely on balance transfers to manage your credit card debt, that’s a big red light that indicates it’s time to take to take a close look at your finances. Borrowing from Jack to pay Jill is a well-known money management technique. Unfortunately, it has landed many very smart people in trouble. If you’re struggling with credit card debt, the earlier you take steps to pay it off, the better you’ll be.