Suze Orman, the Balance Transfer Game and My Thoughts
Posted by Lau on August 7, 2007
I was watching the Suze Orman show on Saturday night. Yes, my life is very exciting!
In her opening, she had a guest asking about “App-O-Rama”, a term I had never heard before, and taking advantage of 0%, no-fee balance transfer offers from credit card companies.
From app-o-rama.com: “The App O Rama is a strategy of completing multiple applications at the same time. The goal is to get as many bonus offers and new credit lines as one desires, in a quick and convenient way.”
The 0% no-fee balance transfer game is on the same line. People get approved for a large credit line at 0%, they deposit the money in a high yield savings account and collect the interest… while slowly repaying the credit card balance. Yeah! don’t forget the part where you have to repay the amount you transferred.
I personally believe that this is a dangerous and risky game where the benefits do not outweigh the risk. However, I don’t see it as something you have to avoid. If you are disciplined enough and don’t mind the idea of putting yourself $30k in debt for a $1,500 (assuming 5% rate) annual reward (which is, don’t forget, taxable) be my guest. If you want to find out more about how to do this properly and get a list of credit card offers, check 2million’s Guide to Taking Advantage of 0% Balance Transfer Offers. He has a little over $13k in the form of 0% balance transfer and he’s pretty good at it.
Even is Suze acts usually in a very conservative matter, I happen to agree with her reasons why this practice is not worth the risks:
- As mentioned above, you have to get a pretty huge amount transfered in order to get some benefits out of it.
In the example above, if you were to get $30k and place it in a 5.12% APR (5.25% APY), you would end up with $1,575 at the end of the year. - Any interests earned are taxable
Let’s say you’re at the 15% tax bracket. That’s $236.25 you’d have to pay in taxes. You really only got $1,338.75 so far. - If you so much as mess up one payment, even on another credit card, the universal default rate might kick in. Remember that credit card company will regularly check your credit report and change your rate if something bad happens on another one of your account. Read “Unfair” Credit Card Rate Hikes by Selena Maranjian at The Motley fool or Eight Things a Credit Card User Should Know on PBS.org, which states that “Even if you make your credit card payments on time, the credit card bank can raise your interest rate automatically if you’re late on payments elsewhere — such as on another credit card or on a phone, car, or house payment — or simply because the bank feels you have taken on too much debt“
- Your minimum payment might end up being quite hefty. And if you plan on repaying that debt before the special offer end, that payment will be even higher.
If you have a $30K balance and the offer is good for 12 months, you will have to pay $2,500 a month to avoid any interest at the end. That’s quite a chunk of money. - Even if all of that hasn’t deterred you from giving this a try, know that your credit score needs to be in the “pretty darn good” range in order to qualify for these offers.
According to Suze, your FICO score has to be in the 760-850 range, which most people do not have.
Again, I’m not saying that playing the balance transfer game should not be done. I’m simply not sold on its benefits and reward/risk ratio.
If you are thinking about doing it, please make an informed decision and know what you’re getting yourself into. More reading:
Articles
Win the Balance Transfer Game by at The Motley Fool
Can you make money in the balance transfer game? by Gregory Taggart at Bankrate.com
Blog Posts
Pitfalls of Using 0% Credit Card Offers To Earn Interest by Jim at Blueprint for Financial Prosperity
How to Profit from 0% Balance Transfer Credit Card Offers from nickel at fivecentnickel.com
How To Make Money From 0% APR Balance Transfers (Index) at My Money Blog
Anon said
Suze Orman made a few good points but also got a few details wrong. Yes, one need to consider the taxes, credit management, missing payment (leads to apr hike!), and such.
She got a few errors:
1.) FICO Score – you don’t need the 760+ for this as many people with lower scores reported success on FatWallet Finance.
2.) Balance Transfer Fee – she said minimum of $250 and up to 3% of total, which is incorrect. Correct is somewhere around 3% with a max of $50, $75, $99. Very few banks will go over $100.
A more detailed calculation was posted on Fatwallet(App-O-Rama: Is there such a thing as a free lunch?) and a App-O-Rama calculator is available on Money Economics http://www.moneyeconomics.com/articleInterestArbitrageCalculator.php
Tanelia said
Anon,
Thank you for the precision. Always appreciated!
I probably wouldn’t disagree with the FICO score since, as you mentioned, most people don’t have a score that is that high and have been playing the BT game.
As far as the transfer fee. The cards I have are 3% with a minimum of $5 and a max of $79 – $99 depending on the card.
However, that’s for balance transfer. People requesting cash advance, which some credit card company treat differently, might end up with a higher fee.
As a for instance, AmEx Blue Terms and Condition:
“Balance transfer fee: 3% of each balance transfer associated with this offer ($5 min./$99 max. per transfer). However, future balance transfers may incur a fee as disclosed at the time of the applicable offer or transaction. This fee, if assessed, is a Finance Charge. Fee for Cash Advances: 3% of each transaction with $5.00 minimum and no maximum. This fee is a Finance Charge”
As always, be sure to read the fine print, as unattractive as it sounds.
Anon said
That is correct, Tanelia. The 3% of total + finance charge for cash advances is normal. What the Balance Transfer game people typically do is to do the Balance Transfer instead.
Think for example: you owe credit A $5000 (perhaps under 0% that is expiring) and credit card B offers you $7500 0% for 12 months. You can have credit card B pay off credit card A with the entire $7500. Then you call up credit card A regarding the overpayment and credit card A will issue you a check for the $2500 credit. You then add that $2500 to your interest bearing account.