A few years ago, there were plenty of avid savers who took advantage of credit card offers — that didn’t charge balance transfer fees — by stashing borrowed funds in a high yield savings account. Those offers disappeared but are starting to show up again. This time around it’s harder to pull such an exploit.
It was a great way for debt-free consumers to accelerate their savings. By gaming the system, one could easily realize several hundred dollars in profit.
Before the recession hit, credit card issuers readily handed out offers where applicants had a 0% introductory rate on balance transfers for 12 months and no balance transfer fee was charged.
You could open one of these credit cards and take a balance transfer check for the amount of the maximum credit line. Then, dock the cash in a high-yield savings account. For the next year, just make a minimum payments on the balance while the borrowed cash earned interest.
With $10,000 in a 5.00% APY savings account, you could earn $500 in interest (assuming minimum payments were made with non-borrowed funds).
Out and Back
After the financial meltdown, no-balance-transfer-fee card deals were nearly impossible to find. Most credit cards charged a balance transfer fee equivalent to 3% of the transferred amount.
Now that the economy has begun showing signs of improvement and consumer spending has picked up, card issuers are presenting potential applicants with these offers.
Currently, the Chase Slate® card and the Discover More card are offering 12-month 0% teaser rates on balance transfers with no balance transfer fee.
Seeing these offers again is reminiscent of the financial scheming in the past. Unfortunately, such ventures are no longer rewarding enough to make it worthwhile.
According to the bank tracked on MyBankTracker.com, the national savings rate average is 0.33% APY. The nationally-available savings accounts with highest payout is UFB Direct’s Airline Rewards Savings account at 1.10% APY – for $110 in interest in one year on a $10,000 balance. The leading 12-year CD rate at Doral Bank Direct is 1.15% APY – $115 interest on a $10,000 balance.
And, you cannot even guarantee that you’ll get an initial credit line of $10,000.
The Proper Use
That’s not to say that these card offers are entirely useless. In the current economic environment, balance transfers simply function as they were designed.
With no interest charges for one year and no fee to transfer balances, cardmembers can use these offers to reduce the interest they pay on their current credit cards and loans in addition to consolidating debt.
On a side note, whoever acts on the clever idea to use borrowed funds to invest in the stock market is walking a fine line.