Question - balance transfer credit cards

[Dave Rogers]

This is something I wanted to ask purely to satisfy my own curiosity.

There's a practice called credit card tarting, in which a new credit card is taken out with an interest-free balance transfer deal to pay off the balance on an older one. There's typically a deal along the lines of 2.5-3% handling fee, then an interest-free period of, say, 12 months, followed by a reversion to the normal card interest level. When the interest-free period expires, the credit card tart takes out another balance transfer card with a different bank, rinses, and repeats.

The benefit to the cardholder is fairly obvious. With a little care, it's possible to borrow a significant sum of money - typically a few thousand pounds - at an effective APR equal to the handling fee. 2.5-3% per annum is still a very attractive interest rate, especially for an unsecured loan. The overhead is minimal; all that's needed is a credit card application once a year, which can be done online in a matter of minutes. Of course, you need a good credit rating.

What I'm having trouble seeing is the benefit to the credit card companies. Clearly, there are hidden catches. The first is that any purchases on the balance transfer card attract the full interest rate, and any payments are credited against the interest free balance first. That means that, in effect, the new card can't be used for day-to-day purchases. But that's no problem, because - by the nature of the system - there's always the previous card available for that. The second is that, if the cardholder misses the deadline for the next card application, the interest rate on balance transfers goes sky high. The only other benefits I can see are the handling fee, which is still very much less than a normal interest rate, and the simple fact that it increases the provider's number of account holders, probably a metric that's used for assessing the health of the business but not, in my view, a very useful one. Longer term, I suppose it's a way of attracting custom as a loss leader.

Is there anything I'm missing here, or is the business model based entirely on (a) customers screwing up and (b) loss leaders to attract more custom?

Dave

 

[Darat]

As far as I am aware your (a) and (b) covers it.

 

[Careyp74]

you covered everything that happens that I can think of.

I want to add also, that for someone who maxed out their original card, it is hard not to use the new one. Chances are, they will add to it, at full APR, and that is the last amount that gets paid on the card. Also, when the person transfers the money again, any interest that gets tacked on will get paid through the transfer, so it is an easy collection, versus someone who can't pay.

BTW, did the JREF Capital One card have a balance transfer fee? I didn't see one.

 

[Gord_in_Toronto]

Some years ago I did some work for a company that financed furniture stores that offer "No money down, not even the tax, no interest and don't pay a penny until next year". The mark customer signs a payment agreement whereby, if the full amount is not paid by the payment date (the next year part) you agree to pay some inordinate interest rate on the full amount dating back to the date of sale. I did express some wonder about this business model and was informed that something like only 1% actually paid off the payment date. It was a very lucrative business!

My wife actually bought something this way at about this time (she fully understood the process as I had explained it to her) and as the payment date approached she had immense difficulty in finding who to send the payment to though she finally did. At no time before the payment date did she receive any notice that the payment was coming due.

 

[daenku32]

I've got 4 CCs that I've done this along the years. It has allowed me to live the typical western lifestyle, as well as pay for unexpected expenses without breaking the bank. I currently enjoy a sweet 3.99% until the balance is paid off on one of my cards. That's less than my mortgage interest. Needless to say I don't transfer anything else onto that card or use it for any purchases what-so-ever.

 

[Furcifer]

I got a GM student VISA with a $500 limit in my first year of University. After 6 months they increased my limit to $1000.

I rarely ever carried a balance, and if I did I made sure to pay the minimum on time.

I bought things at WalMart in the middle of the month, made my payments, then returned the purchases the following month.

Sometime in my second year, my limit was increased to $1500. I paid it off, carried minimum balances when I had to, and continued to make purchases that would ultimately be returned.

I started receiving Mastercard offers in the mail. By my third year I had a student VISA and a Mastercard with a $5000 limit.

I'd take cash advances on one card and pay the other off. A week or so later I'd pay off the advance and put a little extra on the card to maintain a positive balance.

They say this doesn't work, but I can assure you, by the time I left University I had 3 cards (1 VISA and 2 Mastercards) with $37500 worth of credit between them. I also had a $15 000 line of credit from Canadian Tire. And I was cutting up Platinum Mastercards I was getting in the mail.

By the time I thought about buying my first house, I had so much credit, I had to cancel 2 cards and have my limit reduced on the Gold Mastercard down to the $25 000 minimum.

Most of this credit was built on transfer balance credit cards. The last time I saw my credit score I think there were 5 or 6 credit cards I didn't even remember having. I'd get them, transfer a balance, use them a bit, then close the account. I probably never incurred more than $50 in charges during this 5 or 6 year period.

At least I think this is why. I can't for the life of me believe they would be willing to extend the amount of credit I had to a recent graduate making $12.50/hr.

 

[Gord_in_Toronto]

I got a GM student VISA with a $500 limit in my first year of University. After 6 months they increased my limit to $1000.

I rarely ever carried a balance, and if I did I made sure to pay the minimum on time.

I bought things at WalMart in the middle of the month, made my payments, then returned the purchases the following month.

Sometime in my second year, my limit was increased to $1500. I paid it off, carried minimum balances when I had to, and continued to make purchases that would ultimately be returned.

I started receiving Mastercard offers in the mail. By my third year I had a student VISA and a Mastercard with a $5000 limit.

I'd take cash advances on one card and pay the other off. A week or so later I'd pay off the advance and put a little extra on the card to maintain a positive balance.

They say this doesn't work, but I can assure you, by the time I left University I had 3 cards (1 VISA and 2 Mastercards) with $37500 worth of credit between them. I also had a $15 000 line of credit from Canadian Tire. And I was cutting up Platinum Mastercards I was getting in the mail.

By the time I thought about buying my first house, I had so much credit, I had to cancel 2 cards and have my limit reduced on the Gold Mastercard down to the $25 000 minimum.

Most of this credit was built on transfer balance credit cards. The last time I saw my credit score I think there were 5 or 6 credit cards I didn't even remember having. I'd get them, transfer a balance, use them a bit, then close the account. I probably never incurred more than $50 in charges during this 5 or 6 year period.

At least I think this is why. I can't for the life of me believe they would be willing to extend the amount of credit I had to a recent graduate making $12.50/hr.

Very nice gaming the system. You are one of the few who has the strength of will to do this.

 

[bpesta22]

I've got 4 CCs that I've done this along the years. It has allowed me to live the typical western lifestyle, as well as pay for unexpected expenses without breaking the bank. I currently enjoy a sweet 3.99% until the balance is paid off on one of my cards. That's less than my mortgage interest. Needless to say I don't transfer anything else onto that card or use it for any purchases what-so-ever.

I've done it on offers like these to use the money to day trade stocks!

 

[blutoski]

Is there anything I'm missing here, or is the business model based entirely on (a) customers screwing up and (b) loss leaders to attract more custom?

Sounds like you've pretty much got it.

It's not just the credit card industry. Lots of companies that are trying to break into a market offer free trials. Some customers jump from one free trial to another.

Businesses just get out the abacus and recognise that these customers are too few to be a threat to profits.

 

[kakariki]

Sometimes the small print on the transfer offers will say that you can't use the old card(s). You don't have to close the accounts but you have agreed not to use them. If you do they raise the rate on the new card to an outrageous amount.

 

[corplinx]

In the past 2 years, credit card companies have tightened. Surfing balances at 0 percent indefinitely may be passe.

 

[daenku32]

Chase just pumped up rates on one of my cards that I really haven't used in years.

Their reason: To maintain profitability of the account.

Whatever that means.

 

[JoeTheJuggler]

Are the transfer transaction fees plus the temporary promos rate really lower than the regular rate for a balance? I thought they were carefully designed not to be worth it (or at least not worth much).

Sort of like the old Columbia Record Club deal. You get 11 records for 10 cents, but then you have to buy one a month at the "regular" price, but you can cancel after 3 months. It usually worked out that you'd get the records at an average price just slightly better than you could in the store iff you canceled as early as you could. If you let it go longer, you were a loser for sure. (And that's assuming you would have bought or wanted to buy that many records in that time span anyway!)

ETA: The company doesn't lose anything from the few people who actually do play the offer to their best advantage, and they win with the majority of people who take the offer and fail to play it to their best advantage. (And, oh my! how difficult it was to cancel your membership in those record clubs! I remember one you couldn't cancel by any means but by a postcard.)

 

[Filippo Lippi]

It used to be worth moving your balance around. In the days of big bills and less income I used to move my balance around, but back then there wasn't a handling fee.

 

[Dave Rogers]

Typical deal in the UK is 2.5-3% handling fee for 12-15 months interest free credit. If you can find somewhere else I can borrow at 2.5% APR, I'd like to know about it.

Dave

 

[JoeTheJuggler]

Typical deal in the UK is 2.5-3% handling fee for 12-15 months interest free credit. If you can find somewhere else I can borrow at 2.5% APR, I'd like to know about it.

Dave

But that's assuming the promotional rate is 0%, and I don't think anyone offers that anymore. And that also assumes you transfer the balance again before the regular rate kicks in.

Also, the offers I see are more like 6 to 12 months of promo rate, and after that your transfer balance doesn't just go to the regular rate you'd get purchasing items with your credit card; it goes to the cash advance rate, which is considerably higher.

ETA: Here's the terms from an offer on my existing card: offer made June 29, 2009: 0.99% until March 2010; transaction fee is 4% but no less than $10; if you make a late payment or go over you limit, the promo rate instantly disappears, and when the promo rate is gone, you go to the "prevailing variable rate for Balance Transfers which, as of May 31, 2009, is 16.74%. So much like the Record Club deals, it's possible for a consumer to get a somewhat better deal (4.99%--about what mortgages are at these days) but that's if you don't make any mistakes or forget to transfer again in time.

And that depends on the assumption that a similar offer will be available when it's time to transfer the balance. (That may be a safe assumption, but I don't know. Things change.) If not, you'll have potentially moved purchase balances (in my case that's currently about a 10% rate) up to the cash advance/balance transfer rate (nearly 17% a few months ago).

 

[Dave Rogers]

But that's assuming the promotional rate is 0%, and I don't think anyone offers that anymore.

They do over here. I've just taken out a 0% interest deal for 12 months with 2.5% handling fee.

And that also assumes you transfer the balance again before the regular rate kicks in.

Yes, but that's the whole point; when the promo rate runs out, switch to whatever else is the best deal available.

And that depends on the assumption that a similar offer will be available when it's time to transfer the balance. (That may be a safe assumption, but I don't know. Things change.) If not, you'll have potentially moved purchase balances (in my case that's currently about a 10% rate) up to the cash advance/balance transfer rate (nearly 17% a few months ago).

No, it doesn't depend on the assumption that there's a similar offer at all. It's simply a way of minimising the interest on a debt for the coming year that I would have had anyway. At the end of the year, even if I can't find a similar offer, I've still only paid 2.5% for the year, and there will at the very least be something available that's better than the cash advance rate on the existing card. If it looks like there won't be, then at worst I can just live off another credit card for a few months, pay off the balance on the transfer card, and end up paying the purchase rate.

As far as I can see, there's no possible downside as long as I don't screw up. So, as everyone seems to agree, the offer is designed to make money off people who do screw up. The trick is not to be one of them.

Dave