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Personal Finance FAQ

Calculate Your True Costs Before Committing to a 0% Balance Transfer Offer

I don’t understand people who say “I don’t know how to thank you.” Like they never heard of money.
–Anonymous

When I worked at Capital One, it was commonplace for my coworkers to take advantage of every 0% credit card balance transfer they could.

They would max out the credit card with a balance transfer. Once the transfer was complete, they would ask for a check for the credit that had been paid into their primary card (usually a Capital One card). They’d deposit the check in a money market account, usually paying about 3%. Then, a few days before the balance transfer offer expired, they’d withdraw the money and pay off the balance from the balance transfer.

One of my coworkers had amassed $250,000 in credit card debt using balance transfers. Assuming he had a good system to make sure he didn’t trigger the backwards looking interest and fees from not paying off those cards, he was earning almost $7,500 for doing a paperwork shuffle.

I’ve long since opted out of getting those credit card offers; however, I did receive one from a card I actually use.

For a second, I flashed back to my Capital One days and wondered if I could make an easy few dollars.

I have a 1.5% money market for our first bucket in our bucket strategy. So, assuming I did a, let’s say, $20k transfer and was able to get a check for the credit, I’d be roughly $3,000 to the good.

But, wait…there’s more, and this isn’t the Sham-Wow guy with an offer of a second Sham-Wow if you call within the next 15.3 seconds.

There was a little caveat hidden in there.

The minimum fee was the greater of $5 or 3% of the balance transferred.

So, that $3,000 gain would turn into a $3,000 loss.

If you are paying off your credit card in full each month, then this offer, while initially appealing at first glance, comes with a cost that you don’t want to take on.

Yes, if you’re:

  1. Sitting on a credit card with a greater than 3% interest rate
  2. Have the ability to pay it off within 12 months
  3. But cannot pay it all off right now
  4. And have a good enough credit score to qualify for the transfer at 0% interest

Then maybe the offer is a good one.

However, what if you could pay it off in a month and you have a 12% APR?

Then it’s not a good deal, since you’d pay less in interest in the intervening month than you would for the balance transfer fee.

Banks have become wise to the old game that my coworkers used to play with 0% interest balance transfers. That’s why they charge a minimum fee. It prevents savvy people from exploting an arbitrage opportunity, sort of like the people who used to buy $1 coins with credit cards that would allow them to rack up rewards.

If you’re in the process of paying off a credit card balance with a high interest rate, then a 0% interest may be a viable option, but only transfer what you can, with certainty (which may be difficult in the days of COVID-19) pay off in 11 months – giving you a margin of error – lest you get stuck with a high APR for not paying the balance transfer off.

Have you ever done a 0% interest balance transfer? Let’s talk about it in the comments below!

By Jason Hull, CFP®

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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