I have seen a lot of blogs presenting the 0% Balance Transfer game lately. Basically you find a credit card with 0% Balance Transfer APR and use this money to make interest in a 5% Savings Account. (I will refer to this as the APR game throughout this post). This sounds like an easy way to make some money, and in hindsight, it is. If you can get around $10,000 credit limit on your cards and put it into a 5% Savings account, you would make $500 in interest. Easy Money because all you have to do is make the required payment every month and pay off the balance at the end of the promotion period, and you have your “free” money.
I do not see a problem with this if you do not need to make any big purchases soon. I do not see a problem with this is you are not be getting any loans soon that will be based off your credit score. Do not do this if you are planning on buying a house in the next 2 years as you will be greatly sorry. My wife and I are planning on moving in another 5 or so years, so I will need to get another mortgage. Here is why I am saying this (here comes the math, so hold on):
I get a mortgage at X% interest rate. Say because of this new credit card my mortgage rate goes up .25%. On a $100,000 mortgage, I am paying an extra $250 dollars … per year. That one year that I made the $500 off the 0% APR game, I am now paying for it. Say I do two of these APR games, and my mortgage rate still only goes up .25%. I am still paying $250 more a year, so in 4 years, I have just negated my gain. Now, go to a $200,000 mortgage or a $300,000 mortgage. You are looking at paying $500 and $750 more a year respectively. Now when my wife and I go to get a new house (we will probably be looking more at the $250,000 range), that $500 or $1000 we got from the APR game, is gone in the first or second year. Then we start losing money every year after that. Since most mortgages are 30 years, and maybe we will pay extra each year to drop it down to 25 years or so, we are looking at a huge loss of money in the long run.
Now I know my numbers are off in the mortgage calculation, but the numbers are also off in the APR game. I put that $10,000 in a Savings account for the APR game, but I have to pay back a little bit of the balance every month (probably around $50). In the mortgage calculation, I am paying off a little bit of principal every month. Here is the kicker. You get the APR game for 1 year. You have the mortgage for a minimum of 15 years (unless you make extra payments), most likely your mortgage will be 30 years.
A 30 year mortgage at 5.75% for $100,000 would be $583.57 a month or $210,085.02 total.
A 30 year mortgage at 6.00% for $100,000 would be $599.55 a month or $215,838.00 total.
So for a $100,000 mortgage, you pay $5,752.98 extra because you wanted that $500 or $1000 now. I know this sounds like a good idea, but like I always say, if it sounds too good to be true, it probably is.
that’s why I recommend to do this if you are not buying a house anytime soon. Say two years from now is a safe bet. Why? at the end of your 0% bt game, your credit score will go up significantly due to your high credit limit.
You can still play the 0% game in your situation, as long as you have a stellar credit score. For most creditors, temporarily going from 720 to 690 can cause some interest rate-related issues, but going from 800 to 780 temporarily won’t.
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