The Wall Street Journal recently ran an article on the pros and cons of using balance transfers on 0% credit cards as a source of investment capital. It raised more questions for me about what I’ll call "Free-Credit-Card-Capital" (FCCC) than it answered, so I did some research and spent some time thinking about this investment idea, which can be as easy or complicated as you want to make it, if you’re cut out to have anything to do with it at all.
Before you read any further … if you aren’t good with details or deadlines, if you owe money on your credit cards, if you live paycheck to paycheck, if your credit picture isn’t pretty … then this is not a good investment option for you. Don’t ask for trouble.
If it’s any consolation, FCCC wouldn’t work for me, either! I have a knee-jerk negative reaction because I’m disorganized and feel it’s likely that I’d mess up. I’m also a worrywart, so even if I set up automatic payments for the required monthly amounts, I’d fret that something would go wrong and my interest rates will go up across the board, while my FICO score would tumble. But that’s me.
How You Can Benefit from Free-Credit-Card-Capital
The first step is finding some FCCC. It’s important that you choose the right card. You want one that offers the 0% balance transfer come-on -– and does not limit your use of those handy convenience checks for transferring balances from other credit cards. You want to be able to cut a check to yourself for FCCC purposes with no strings or fees. If there’s a balance transfer fee associated with the transaction and/or if the card issuer will treat it as a cash advance, it’s not worth considering the card for investment purposes. Similarly, if the introductory term is short, find a card with a longer term, ideally a year.
Even if the fine print doesn’t raise any red flags, I recommend calling the customer service number to ask about the convenience check policy before you apply for the piece of plastic. Assuming everything checks out, if you choose carefully, you’ll soon get the card and the check.
Once you get the check, invest your FCCC in a low-risk savings or money market account, where you can earn in the range of 5%, say at an online bank or via your credit union. Don’t put the money in the stock market, because you won’t be able to keep it there long enough to weather any economic storms that might sink the Dow.
Key, of course, is remembering to make required monthly minimum payments on the credit card and to pay back the total of what you’ve borrowed before the card’s introductory rate expires.
Don’t use your FCCC card for purchases. Why? Because they’re quite likely to be billed at a high rate. Even if you intend to pay off the balance right away, and even if you send in enough to cover the purchases, the lender will credit your payment against what you owe at 0% … while the debt at the higher rate grows by a hefty amount, month after month.
As for the interest you earn in the process, that’s yours to keep, minus the assortment of dear old income taxes you have to pay. The more FCCC you can access, the more you’ll earn. This has led some folks to use a strategy known as "App-O-Rama," where you apply for multiple credit cards at the same sitting, hoping that your applications will be approved and your credit limits will be high … before your FICO score reflects the increased lines of credit in your name and the multiple applications. On the assumption that your FICO score is high, you may be able to amass a larger pot of FCCC than you thought possible. But please watch out!
"App-O-Rama" Warnings
- Be sure you know what you’re getting yourself in for with each card before you apply. Cards that treat FCCC balance transfers as cash advances should be ruled out. Ditto for cards that charge balance transfer fees.
- Take advantage of automatic payments or come up with another way to be certain that you’ll never be late or miss a payment. For some, a spreadsheet might do the job. Whatever. You want to make sure nothing will go wrong. Otherwise, you’ll end up paying a lot in fees and a higher interest rate –- across the board, for years to come.
- Don’t build up an FCCC fund if you’ll need additional credit in the near future, for example, to buy a home. You don’t want your FCCC mucking up the works and making your mortgage more costly.
If you want more information about FCCC, I highly recommend "0% Daredevils Chase ‘Free’ Cash," by MSN Money’s personal finance columnist, Liz Pulliam Weston.
Have you used free credit card capital to make money? Please tell us about your experiences!
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