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The new rules of the balance transfer game

By , CardRatings contributor
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Life was once good for balance transfer card hacks. Very good indeed. Some of history's best credit card balance transfer deals ensured life was good.

Back in the day, credit card companies didn't merely charge zero interest for months and cap or outright waive transfer fees for new cardholders for an initial period. They also applied the zero APR to all uses of the card, including purchases and cash advances. Making matters still better, this halcyon period coincided with a time of relatively high interest rates on demand deposits.

The good old days of credit card arbitrage

Put them together, and you had an opportune moment in the history of credit. "It was a really good time for credit card arbitrage," says Amber Stubbs, managing editor of CardRatings.com, Foster City, Calif. "After several years, it came to an end with the credit collapse. Issuers really started scaling back in all areas, but particularly in the balance transfer introductory offer."

Today, gaming the system through credit card arbitrage would be very difficult, Stubbs says. The reason? Much higher transfer fees, as well as low interest rates that render it well-nigh impossible to earn sizable gains. In other words, the arbitrage game is over.

While issuers have increased introductory periods to 12, 18 and even 24 months, "they haven't budged on fees," Stubbs says. With no cap, fees often reach 3 percent of amounts transferred. Thus, the more money transferred, the more a new cardholder pays in fees, making it difficult to turn a profit in the low-interest-rate environment characterizing this era.

Banks have tightened up on credit

Agreeing is Lynnette Khalfani-Cox, personal finance expert and founder of the free financial advice blog AskTheMoneyCoach.com, as well as author of "Perfect Credit" and the New York Times bestseller "Zero Debt."

"There's no question several years ago, people were able to effectively work the system, and use zero-percent credit card balance transfers, getting cash from these, depositing the cash into an interest-bearing account and making money off the transaction, even after paying balance transfer fees and any other costs associated with the transfer," Khalfani-Cox says. "They would mainly use high-yield savings accounts and money market accounts for deposits."

Harder to qualify for balance transfer

The problem is not just that the Federal Reserve has been keeping interest rates artificially low for 3 years, making it nearly impossible to earn money on deposits. Banks are also very cautious these days, and only offer the best balance transfer deals to customers with high credit scores, Khalfani-Cox says.

Thirty percent of Americans have credit scores of 620 or less and wouldn't qualify, she adds. But even if they did qualify, they'd have to think about what kind of transfer offers the banks would provide. "Now you'd have to transfer a large amount of money to qualify," Khalfani-Cox reports.

Banks have "wised up"

The founder and editor-in-chief of personal finance blog FiveCentNickel.com, known simply as Nickel, says that banks have "wised up" to the arbitrage game and halted it through the aforementioned transfer fees. Combined with low interest rates, those fees eat into earnings. But that's not the only thing eroding gains. "On top of that, your earnings are taxable," Nickel says. "So it's very difficult to take advantage of these offers like it once was (possible to do)."

But there are other ways to take advantage of the ability to borrow money interest-free for a period of time, and save considerable dough depending on your circumstances.

How balance transfer can save money

For example, suppose you owe money to the Internal Revenue Service for back taxes, as many people do. The IRS charges 1.5 percent a month, or 18 percent a year.

"So a balance transfer would be a good deal to pay that off," Khalfani-Cox says, adding if you owe $25,000 or less you can set up a payment plan through the IRS. If you obtain a zero balance transfer for a year, you've just saved 18 percent you would have otherwise forked over to the IRS, Khalfani-Cox says.

Using a balance transfer credit card to boost your credit score

You can use a zero-APR balance transfer card to potentially raise your FICO credit score. That's because opening a new credit account bestows upon you more available credit.

Thirty percent of your FICO score is based on how much you've charged as a percentage of how much credit is available, or your credit utilization rate.

How that works

Khalfani-Cox offers this real-world example.

  1. Let's say you have a credit card with a credit limit of $10,000.
  2. If you run up a balance of $5,000 on this card, your credit utilization rate would be 50 percent.
  3. Now someone comes along to offer you a balance transfer deal on a new card with a $5,000 credit limit, giving you a total credit limit of $15,000.
  4. You transfer $2,500 of the balance on the old card to the new card.
  5. Now each card has a balance of $2,500. You still have the same total amount of debt ($5,000), but because your total credit limit is now $15,000, your credit utilization rate drops to 33 percent from 50 percent.

"You've knocked down your credit utilization rate, which is nearly one-third of your credit score, and in so doing very likely improved your credit score," she says. "Now, what can you do with your higher score? If you're in the market for a mortgage, and your score just climbed by 20 points, you now likely qualify for a mortgage with a lower mortgage rate, saving thousands of dollars over 30 years."

A penny saved…

In other words, you may no longer be able to make money with zero-APR balance transfer credit cards, but you can certainly still save money, Khalfani-Cox says, adding with a chuckle, "Wasn't it Ben Franklin who said, 'A penny saved is a penny earned'?"

If you play your credit cards right, you could save on interest payments, boost your credit score and save hundreds or even thousands of dollars by securing better loan terms.

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