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August 04, 2005
Free money from balance transfers
I haven't done the balance transfer trick in a while, but I'm thinking of starting up again. For a while, I was deluding myself into thinking were going to buy a house soon and I didn't want to knock down my credit score by a few points by applying for credit cards. But since 2 bedroom/1 bath 90 year old homes cost $650K and up here on the Bay Area peninsula, I'm realizing we won't be able to afford that for years.
The basic idea is to get free loans from credit card companies through 0% balance transfers and earn interest on the money during the promotional rate. The basic steps:
- Apply for 0% balance transfer from, say, Discover Card to your, say, Bank of America Visa
- After Discover pays Bank of America, call Bank of America and ask for a refund, telling them that you overpaid your Visa
- When you get the refund, put the money into a money market account, say, an ING or Virtual Bank money market
- Pay the minimum monthly payments on the balance transfer to Discover Card every month
- Pay off the balance when the promotion ends with the cash in your money market account
- Keep the interest.
- Rinse and repeat, if desired.
You have some things to watch out for, though.
First, the balance transfer money isn't as easy to earn as in the past - a lot of credit card companies, especially Discover, charge balance transfer fees - so you have to make sure the interest you're going to earn, after taxes, will cover the fees. Seecond, you don't want to use the card that has a balance transfer on it. That's because, even though you might have 0% on the balance transfer balance, you'll likely have a much higher rate on the purchase balance. And when you make that minimum payment every month, it will be applied to the balance transfer balance, not the purchase balance, meaning your interest charges will start to add up. So only use dedicated cards for balance transfers.
A nice discussion is here talking about more of the catches and subtleties of making free money. When I was a grad student, earning $17K a year, I once had about $40K in free loans from the credit card companies, earning around $800 a year at 5% in money market accounts. Interest rates aren't as good now, but that was a lot of money to me then, considering, after rent and food, I had about $150 left at the end of the month.
Posted by brian at August 4, 2005 07:11 PM
Comments
Looks like you'd make about $2000 a year with those figures.
Posted by: Isalu at October 14, 2005 12:37 PM