27 April 2006

The "Zero Interest" Game

Blueprint for Financial Prosperity is the latest blogger to get in on the "Zero Interest" credit card game. The basics of the game are that you open credit accounts that advertise zero interest on balance transfers for a given period of time (usually 6-12 months). That money is then placed in a high yield account (usually Emigrant Direct or HSBC) to make "free money".

But is the money really free? Basically, you're opening several credit cards, immediately maxing them out, and then closing them after paying off the balance with a transfer to another card. To say that potential borrowers would be scared to death of this pattern on your credit report is an understatement. It also can whack your credit score. Stop Buying Crap tracked his FICO score while running this scam and his score dropped by 140 points. 140 points can mean thousands of dollars in interest on car and home loans.

Don't think you'll need a loan in the near future? Well, your credit score could be FUBARed for some time based on past utilization. What if you wreck your car? You may need a loan before you think you do.

Not only can you wreck your FICO score, but what if you miss a payment or get a due date screwed up? What if your new card doesn't do the transfer by the day you need them to? What if you miss a payment somewhere else and the card company yanks the free interest? What if you use the card to make a purchase (purchases generally don't count for zero interest and all payments go to balance transfers first)? All of these would lead to 25% interest being paid since the date you transferred the balance.

It seems like a lot of risk for a couple of hundred bucks in "free money". Plus, you'll pay tax on the interest you do earn, so that lowers the take by another 30% (including state taxes). No, thanks.


BudgetGuy said...

I'm currently earning about $200/month from this. Using my banks online billpay it's a peice of cake. took a total of 1 hour to set up.

Anonymous said...

If you were dumb enough to use the card for a purchase (most of us doing this deal don't even activate the card / remove it from the envelope it came in), the 25% (or whatever) high rate would only apply to the amount of the purchase, not the whole balance transfer since the date you made it.

Most cards that do 0% on BTs offer 0% on purchases as well, anyway.

And we don't close the card when we're done with the BT -- we leave it open, which is just more credit available to us, which is GOOD to see on a credit report.

The report of a high balance (it's smart to keep utilization < 50%) will go away 2-3 months after the BT ends, and the request to open the account will be gone in 24 months.