A zero percent introductory rate on a credit card is a good deal, but not necessarily a great deal.
In the mid-2000’s and even into 2008, 0% balance transfer cards were all over the internet and in your mailbox. Every credit card company was offering introductory rates of 0% interest. Eventually, some people began to figure out how to make money off of the low introductory rates.
The basic idea is to apply for a credit card with a 0% introductory balance transfer or purchase rate and then figure out a way to deposit the money into a savings account. If you are careful to make monthly payments and pay your balance off on time, you can generate interest income. This is called balance transfer arbitrage or BTA.
Deal forums and sites like Fatwallet took BTA to the next level by using a method known as the “app-o-rama” or the AOR. In the UK, this strategy is sometimes known as “stoozing”. During an App-o-rama, a person applies for 30 to 50 credit cards in a matter of hours in order to be approved for as many cards and access as many lines of credit as possible. The idea is for all of the credit checks or “hard pulls” to happen at nearly the same time so that the companies do not see how many applications are being generated. Once the credit lines are in place, the applicant collects the bonuses and other premiums from the cards. Then they set to work to get as much balance transfer money as possible deposited into a high interest bank account. In 2002 – ’07, there were reports of individuals making $20K, $30K and even as much as $50,000 in just interest using this method.
The recent problems with credit and banks and mortgages all but dried up 0% introductory offers from credit card companies in late 2008 and early 2009. Furthermore, the interest rates being offered by online banks are woefully low at the moment. My bank, FNBO Direct is currently at 2.1% percent. Which means that a monthly balance of $10,000 would only generate around $200 over the course of twelve months. If my purpose is to generate income, $200 over a year’s time is not worth the effort and credit score hit.
But let’s be real here – BTA and the AOR are not financial strategies that your financial advisor will recommend. If you struggle with record keeping, procrastination or fearfulness, you should not consider embarking on an AOR.
That said, I keep a rolling BTA balance as an emergency fund. We have very little savings, but our credit score is very good. If we need quick cash in an emergency, the money is there. I recently took advantage of $14,000 worth of balance transfer money from my Miles by Discover® Card. This BT was only for six months, but the balance transfer fees were less that $150 – small price to pay to have the money sit in my bank account for six months. We will pay off the remaining balance in May and then roll over a small portion of it to another 0% APR card like the IberiaBank Gold Cash Back Rewards Card that is offering 0% APR for six months and no fees for Balance Transfers.
We will not be able to transfer the entire $14K to the card for which we applied, but this particular offer is a 12 month/0% interest/no fee offer. Too good to pass up.