- What are facts for the goose may be fiction for the gander – do your own research before taking any action based on this post
- If your past record shows you don’t have much financial discipline, please STOP reading this post right now. I would rather lose a reader, than lead a reader into the mire of debt and desperation
Short ‘Motivating’ Intro (aka. “The Bait”)
Last year the better half and I applied for a credit card that gave out cash bonus incentive. The only reason we applied was that we hadn’t applied for a new credit card in a long time and our credit scores were in great shape, so it would be stupid not to take the cash bonus (I think $300 in total). The real bonus, though, was that each of us got a $20K credit line (resulting in a total of $40K!). We just got the cards and let them sit. Within 6 months, we each received the 0%APR balance transfer (BT) offer. They agreed to send a check for the amount instead of us having to transfer it to another card. I applied for another card ($10K limit this time) and we added some of the saved money we had and opened a CD for $55K for 9 months. When the CD matures, we will return back the principal “loaned to us” by the credit cards and pocket the interest of $2000 or so. Easiest money we ever made. Just to put the amount in perspective, that covers 4 monthly payments if you plan to buy a BMW, or around one years’ payment if you buy a sensible pre-owned vehicle! (We? Oh, we plan to use it for a ski vacation, with any leftovers used as an extra payment for the mortgage
Now onto “The Facts”
- The first and the foremost thing you need is a large credit line. It is just not worth it otherwise. Currently, most cards charge a balance transfer fee of 3%, sometimes with a maximum limit. So unless you can earn well over that in interest, it is not worth it. Also, remember the interest is taxable. Unless the returns are substantial, its just not worth the hassle.
- If you don’t want to ding your credit score too badly, then your total credit line (from all credit cards) should be at least twice that of the amount you are borrowing using the BT offer. i.e., your total utilization across all cards should not exceed 50%.
- From the time you do the BT, till you return the money, your credit score WILL be slightly lower. Once you return the BT money, your credit score is supposed to bounce back to normal (or may even get better, thanks to the reduced percentage of total utilization) within 3-4 months. So, you should go for the BT only if you do NOT need any long-term loans (ex, car, mortgage etc) for the period of the BT + 6 months buffer zone.
- The credit card for the BT should be used exclusively for BT. No matter what, DO NOT use that card for purchases. The way it works, credit cards ALWAYS apply the payments to the lowest interest balance first. So if you post a $1000 purchase to a credit card with $10K BT, and the purchase APR is ~10% and the BT is at 0%, any monthly payments you make will apply to the $10K. Your returns from the BT will diminish greatly if you have to pay 10% interest on $1K while earning 5% interest on $10K!
- Remember you will now have an additional monthly payment to make. Speak to the customer service rep or wade through the terms of the BT to determine how much your minimum payments will be. Only BT that much amount for which you will DEFINITELY be able to meet the minimum payments.
- Never be late on your monthly payments! Most credit card terms clearly say that the promotional 0% BT rate is valid only if you make the payment is on time. An additional tip, Always make payments larger than the minimum payment. When your credit report shows you are making only minimum payments, it will make lenders nervous, since you appear to have financial trouble and seem to be barely making it. They don’t know how much exactly you have paid, only whether its minimum payment or not. So even paying just $1 more than the minimum payments should be OK.
- Never put the BT money in risky investments. That means, no stock, no horse races or online gambling! Park it in a safe place. Two options that appeal to me are Online high-yield savings and CD’s. The downside with online savings account is that the money is available to you, and with all that money lying around, you may be tempted to use it for something else. The upside though, is in case of an unfortunate missed payment if your interest goes up, you can easily pull the money out and pay the card back, so you don’t get slapped with the exorbitant interest. CDs have the exact reverse pros and cons. The money is not available to you to be tempted to use elsewhere, but in case of a missed payment, if you break the CD, you may be penalized with around 3 months worth of interest
How to get large credit lines
- Maintain high credit score. That is a no brainer.
- Slowly build up the credit line. The better-half and I have been using credit cards for over 7 years now and we each have total credit lines of $50k – $60K. Except in the early years when we were financially illiterate, we have not applied for more than one or two cards per year – no matter how good the signing bonuses are. Thanks to the relatively large total limit that makes our utilization low, good credit score and no excessive credit inquiries, the lenders probably feel they can trust us with larger lines. The newer cards we get these days have fairly high credit lines each.
- An opposite school of thought is timing the applications right, and applying for a slew of credit cards at one shot. I do not like this strategy since you could end up with a large number of cards each with a small credit line. Way too much management headache, for my liking. I would rather have a few cards with large lines. If you are interested in this strategy search the Fatwallet Finance Forum for the keyword “App-O-Rama”. Several prominent members of that forum have claimed a lot of success using this strategy, while at the same time several novices have been burnt badly. So proceed with caution.
- Consolidating different credit lines Suppose you have two different cards, but both are by the same provider, say Chase. If one of them offers a 0%BT, you can call the customer service rep and request part (or all, for that matter) of the credit from the other line be transferred to this line. Many providers allow you to do this.
- Periodically, if you maintain good standing, card providers will increase your credit lines. If not you can call up and request them for an increase in your credit line. Make sure you tell them you want the credit line increase only if they can do it without a hard credit pull, to avoid any unnecessary credit inquiries showing up on your credit report.
There is tonnes of information about this in the Fatwallet Finance Forum. Read voraciously and devour every bit of information you can lay your hands on, before you sink your feet in, if you feel this is something for you. Choose wisely and you will be rewarded handsomely
To read how to build good credit history, check out this post.