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Monday, November 26, 2007

Yes or No? Leveraging Interest Free Credit Card Transfer for Free Money

I will admit it; I am pretty particular about my beliefs and research when it comes to personal finance. There are a ton of sites out there that want to tell you how you can make money, or better yet – make the money you have work better for you.

As I mentioned a few weeks ago, I follow the MyMoney Blog through Google Reader, scanning some of the article, of which sometimes I find some value that keeps me reading. One thing that continues to alarm me from Jonathan's posts are his use of Credit Cards to generate "interest free" investment capital of the 20k plus he has on cards by leveraging the free interest offers that several credit card companies offer.

Jonathan mentions that it may be alarming the amount of credit card debit he has, but then explains his reasoning for his decision to use it. I will admit, it does sounds good – who does not want free money raise their hand – no one! However, I entirely disagree with Jonathan about the level or risks associated with this "free money" tool and believe its use should be a rarity.

In fact, in his situation of trying to purchase a new home, one would think it could be particularly damaging. When you lay it out, a 3% gain of $600 a year after tax (assuming leveraging a high-yield savings account) versus the risk of negative impact just does not seem worth it.

Here are some of the reasons why.

1. Credit Cards continue to offer free interest on balance transfers. This is a huge assumption that this play makes. Let's say that 6-months from now research shows that the free interest offers do not increase the lifetime value of the customer. Credit card offers of free transfers dry up and six months later you have a huge debt to pay off or you now pay interest on a monthly basis that quickly exceeds your potential gain.

2. What if you miss a payment? Do you ever go on vacation? Have you ever been late on a payment? Ever have an emergency? If any of those happen to you then your interest rate on that entire stack of money jumps to 21% or higher. In two months you've lost more than you could have made in the entire year, actually putting you in the hole for something that you wanted to make money.

3. Want your credit score to take a hit? Well, it is a proven formula, open up lots of credit cards and use up large portions of your available credit and you score will go down – even if you always pay your bill on time. Looking to buy that first home?

There are a few others which I am not even covering here. Basically, the summary is this: Can you use interest free credit card balance transfer to increase your income? Yes, you can – however, the risks associated with it strongly outweigh the benefits. Especially since there is a coming climate change in the marketplace that will threaten such offers.

How many people have obtained their financial goals by loading themselves up with five or six figures of credit card debit? You already know the answer to that.


Grant Powell said...

Well said, Ken. I agree. Financial success does not come in the form of credit card debt. No matter which way you look at it.